Not all aspects of the tax code will apply to your family. However, there are certain areas that you want to be aware of in advance. The Nanny Tax is just one example of something that can easily get overlooked. Let’s review the quick facts to help you avoid tax trouble down the road!
How Does the Nanny Tax Work?
The first thing to understand is that the “Nanny Tax” is somewhat of a misnomer. This part of the tax code applies to more than just nannies and babysitters. It actually covers all types of “household employees.” For example, if you regularly pay a housekeeper or gardener to help with the general upkeep of your home, the IRS might end up viewing them as an employee come tax season—even if you don’t.
The IRS will check on a few different details regarding the working relationship to determine whether you have a household employee or not. The Nanny Tax would typically apply to situations where you:
· Control how the work is done
· Dictate when the work is done
· Provide the equipment and supplies
Other considerations include whether the worker’s income is economically dependent on you employing them. This might be the case even if their work for you isn’t full-time or part-time. Being paid hourly by the job or weekly can still trigger the Nanny Tax.
Tax Consequences for Household Employees
If you’ve reviewed the descriptions above and still wondering whether your service provider might actually count as a household employee, then there another couple of things to know:
• Limit of $2,400 per year – In general, you won’t be responsible for Nanny Tax payments when you pay less than $2,400 over the course of a tax year (or $1,000 in any calendar quarter). So that’s a relief! However, if the pay exceeds these limits, you may need to withhold and contribute to Social Security, Medicare, and other unemployment insurance taxes. For many families, this can be a whole new ballgame. But working with a CPA or tax planner can help you begin to run through those options.
• Overtime pay – Depending on the current federal and state laws, you may be required to pay household employees for overtime.
• Fines and penalties – Regular payments for employment taxes may also be required. Otherwise you could be facing surprise fines and penalties.
• Additional regulations – This can sound odd, but you might need to have insurance in place for worker’s compensation as well. You might need to have specific coverage in place, on the off chance that your household employee is injured while on the job.
Let’s Help You Plan Ahead for Tax Season
Understanding the dynamics of how a household employee relationship will work in the eyes of the IRS isn’t all that easy. Fortunately, we can help clarify what’s actually going on in terms of your tax obligation. But more than that, we’ll help examine the potential tax deductions you might have in the other areas of your life!
Contact our team at NSO & Company to schedule a quick consultation. Whether you’ve been working with a nanny since the start of the year or you’re getting ready to hire a household employee for the first time, we can help you make the right plans for a smooth tax season.
