Taxes on Nanny/childcare

[squirrel]

Looming to hire part time help.  IRS guidelines state if you pay over $2000 annually or $1000 a quarter you have to declare as employee.  Anyone have experience or insight with this?

Do you have to pay just FICA, or do you have to withhold and send in state and federal taxes.  The latter seems like overkill and I have heard both.   We currently have a service that we pay that handles all of this (of course with additional premium which makes the rate much higher than local market rates so looking to phase this out).

Any insight is helpful.

[scbunker]

Squirrel, I don't want to hijack your thread, but I have a very similar question that maybe can be answered at the same time?

My wife is pregnant with our first child (due in June). It is very likely that her sister is going to keep the child while we're at work. She's willing to do it for free, but we want to pay her for it. Does the answer to Squirrel's question change if the nanny is family? Can we call the money we give her a 'gift' since she's willing to do it for free? Does it matter whether the her sister watches the child at our home or hers?

[squirrel]

I believe you can gift money to anyone for any reason.  Up to $14k a year I believe, but haven't checked the latest.

The IRS definition is if someone is in home home performing a service over a dollar amount they are considered an employee.  I guess the bigger question: Is the sister doing to help, or doing it to be paid.  Sounds like since willing to do it for free then she would not be an employee, and since family (since many aunts, uncles, grandparents help parents) I don't imagine the IRS could press you for it.

Now on a completely separate occasion if you decided to gift her an amount of cash as a gift with no strings, that in my mind is a separate issue.  I would clarify with an accountant however.

[jfoxcpacfp]

squirrel wrote:

Looming to hire part time help.  IRS guidelines state if you pay over $2000 annually or $1000 a quarter you have to declare as employee.  Anyone have experience or insight with this?

Do you have to pay just FICA, or do you have to withhold and send in state and federal taxes.  The latter seems like overkill and I have heard both.   We currently have a service that we pay that handles all of this (of course with additional premium which makes the rate much higher than local market rates so looking to phase this out).

Any insight is helpful.

Click to expand...

Requirements at the state level vary by state. For instance, in some states, you'll need to have workmen's comp.

See this article I wrote for PMD that has the other info you are looking for.

[DMFA]

What you pay your nanny has to be taxed somehow.  Whether you cover it yourself with her as your employee (W-2) or pass it onto them as a contractor (1099) is up to you.

Be aware that you are able to reimburse yourself from a dependent-care FSA and can use the child/dependent care tax credit [link] (up to 20% of expenses, $3000/child or $6000/family) for anything that wasn't reimbursed, except in certain circumstances.

If you're incorporated and she's an employee of your corporation, and if your corporation does a 401k...my question is, does that open a can of worms vis-a-vis non-discrimination and top-heaviness of the 401k plan? [IRS pub 560] [IRM 4.72.5]  Or am I over-thinking this?

Johanna's article linked above is a good explanation for what should capture most people in this situation (like I may be soon).

[squirrel]

Thanks Johanna.  Any reference on individual states?  I live in NC.  Will start searching their website.

Also, it seems for federal, all that is required in the FICA (15.3% for counting employer and employee components).  What about income tax.  Assume that places the reporting requirement and income tax payment on the employee?

Thanks!

[jfoxcpacfp]

squirrel wrote:

Thanks Johanna.  Any reference on individual states?  I live in NC.  Will start searching their website.

Also, it seems for federal, all that is required in the FICA (15.3% for counting employer and employee components).  What about income tax.  Assume that places the reporting requirement and income tax payment on the employee?

Thanks!

Click to expand...

Google "household worker taxes in NC". I got several hits on good articles but d/n/h time to read further.

[MPMD]

Sorry to resurrect old thread but seems to touch on my issue.

Is there any way (e.g. by declaring your nanny a 1099 employee) to pay them cash?

I would prefer to be "on the books" but we found someone great who won't work except for cash.

I really don't quite get why the IRS cares. If I am paying someone a fair market rate in chunks of cash it's up to them to file and pay taxes. Why/how is this different from when I moonlight and get paid as an ICC and then get a 1099?

[Miss Bonnie MD]

MPMD wrote:

Sorry to resurrect old thread but seems to touch on my issue.

Is there any way (e.g. by declaring your nanny a 1099 employee) to pay them cash?

I would prefer to be “on the books” but we found someone great who won’t work except for cash.

I really don’t quite get why the IRS cares. If I am paying someone a fair market rate in chunks of cash it’s up to them to file and pay taxes. Why/how is this different from when I moonlight and get paid as an ICC and then get a 1099?

Click to expand...

HUGE liability. It's illegal for one and if you're in the PMG group tons of nannies have taken their employers to court. Not sure any doc would risk this liability....

[VagabondMD]

MPMD wrote:

Sorry to resurrect old thread but seems to touch on my issue.

Is there any way (e.g. by declaring your nanny a 1099 employee) to pay them cash?

I would prefer to be “on the books” but we found someone great who won’t work except for cash.

I really don’t quite get why the IRS cares. If I am paying someone a fair market rate in chunks of cash it’s up to them to file and pay taxes. Why/how is this different from when I moonlight and get paid as an ICC and then get a 1099?

Click to expand...

If you provide a 1099, it does not matter whether you paid in cash, gold bullion, bitcoin, or goats (FMV). But likely, your prospective nanny wants cash to avoid paying taxes, and while this is commonplace, it is illegal. We passed on several excellent prospects because of this issue.

[Golfing Doc]

I believe household employees must be issued a w-2 and not a 1099. Either way, paying under the table is definitely illegal

[spiritrider]

Golfing Doc is right. The IRS is very clear.. If you exceed the limits, you must pay nannies and any other household help as W-2 employees. There is no wiggle room for paying on a 1099. There is an IRS Publication that covers this.

This requires withholding FICA and income taxes from their pay. You will also have to pay federal Unemployment Insurance (UI), state (UI) and in many states Worker's Compensation Insurance. Of course in CA, there are other payroll taxes. Whether you have to pay overtime is subject to state law.

Note: To answer another question. You can have an owner-only retirement plan as long as you don't use the same EIN as your business to pay them. They are not an employee of your business and employees or not, your household is not a business subject to controlled and affiliated service group rules.

[spiritrider]

P.S. The relevant document is Publication 926 Household Employer's Tax Guide

[Anesthesia84]

Yep, we looked and looked to try to find a way to get around it.... the IRS is very clear. W-2 only for a nanny unfortunately. The way we had to do it was to keep her take home pay the same as if she was being paid cash, which just meant that our financial outlay was more each month. Now we've switched to an au pair - much more affordable!

[MPMD]

Thanks for replies.

I see the truth in this I just still don't quite get it from the standpoint of the IRS. They seem to be saying that a household worker is not allowed to be an independent contractor. Do we think that this is just b/c basically none of them would file? I haven't been asking to see their tax returns obviously but also anecdotally it seems that most of the people we are interviewing are not filing any taxes and haven't in years. I wonder what would happen to them the first time they do actually file? Couldn't that trigger an audit that could just absolutely devastate them? Seems like IRS would get back statements and flag everything coming into their bank account as income? Maybe they all just lead cash lives though.

Yeah we are definitely passing on someone we really liked b/c she was non-negotiable on getting paid cash. From polls of our friends paying cash actually seems to be the most common thing in Chicago. Unclear if they are taking a carefully calculated risk or just don't know any better. I guess if you just took out a bunch of cash every month and paid them that way (as opposed to with checks) the IRS could never prove that you had a nanny?

Lots of interesting stuff here for sure.