These days the IRS is investigating all types of fraud and getting serious about slapping fines on offenders. The IRS is now investigating domestic employment – their efforts are no longer limited to financial technology companies and unreported cryptocurrency transactions, false unemployment compensation claims, and PPP Loan fraud.
Lately there has been a significant trend toward families employing in-home caregivers to solve both their child care and senior care needs. There are now baby nannies and “granny nannies.” This domestic employment trend was started and exacerbated by closed schools and senior facilities during the 2020 and 2021 pandemic.
In the past folks hesitated about putting domestic employees “on the books,” if they worried about the maze of federal and state employment law, and payroll compliance issues like overtime, paid sick leave, family medical leave, insurance requirements, etc. In-home workers needed a safety net, when prior to the pandemic they were quite happy to be paid under the table. Families agreed in order to avoid taxation, and because they lacked awareness of the IRS penalties, and problems that can arise from an unemployment claim, workplace accident, wage dispute, etc.
Household employment has its share of non-compliant taxpayers, hence IRS scrutiny, and tax fraud can cost you plenty in penalties. Here are some of the typical tax mistakes made by families and how to fix them.
- Classifying a domestic worker as an independent contractor
Nannies, housekeepers, senior caregivers, and any other household workers are considered employees and not independent contractors because the family is in control of when and how the work is performed. The IRS has consistently ruled this way over the years. Plus, giving a nanny a 1099 and calling them an independent contractor is considered tax evasion.
What does this mean? The family should get a federal employer identification number, register as an employer with their state, and file a new hire report. They will need to pay their share of Social Security and Medicare taxes and withhold the same from their employee’s pay. The family will also owe federal and state unemployment taxes.
At the end of the year, the employee gets a W-2; the family submits a copy of the W-2 and Form W-3 with the Social Security Administration, and then files Schedule H with their personal tax return.
- Placing a worker on a company payroll
Household employees should not be paid through your business. Tax deductions on a company payroll require all employees to be “direct contributors to the success of the business.” Putting household workers on a business payroll is considered an illegal tax deduction.
A sole proprietor of a business or farm can report household payroll taxes on their company’s Form 941 or Form 943 for ease of filing. That does not mean they can put a household worker on their business payroll. They can just report the taxes with their business filings.
Even with this exception, and to keep it simple, it may be best to keep household payroll taxes separate from business-related taxes.
Business owners with domestic help can remit household employment taxes quarterly using Form 1040-ES and then file Schedule H with their personal tax returns while continuing to report their company taxes on Form 941.
- Losing out on tax breaks and pandemic tax credits
A nanny’s pay is a qualifying expense for the Child and Dependent Care Tax Credit. This tax credit covers up to 35% of $3,000 spent on care for one child or up to $6,000 for the care costs two or more kids, depending on your income level. Children must be under the age of 13 years. The amount of the credit gradually decreases based on a family’s adjusted gross income, this translates to a maximum tax credit of $1,050 for care of one child or $2,100 for costs related to two or more youngsters. Taxpayers who make more than $43,000 can claim only 20% of their costs, or $600 for care of one child and $1,200 for two or more youngsters.
Reach Out To Us: the processes for domestic employment are different from those for commercial employment. The secret to preventing domestic employment tax and labor law problems is to handle paperwork and set up properly at the time of hire. This would ensure proper tax withholdings, eliminate delinquent state tax filings, and be sure labor law requirements are covered. Addressing everything up front with your Nanny will ultimately save time, money and frustration. Call 855-542-7537
