Tuesday, March 21, 2006
Compensation: Gross vs. Net pay
Household employment is about they only kind of employment where the majority of applicants will state their salary requirements in terms of NET or take home pay instead of GROSS (before tax) wages.
This perplexes the majority of employers. What does the applicant mean? Do they want the employer to pay ALL of their taxes, including income taxes? If so, how does one calculate this given the vast array of personal situations. The housekeeping applicant who is single with two teenagers has a much lower tax rate than the married applicant with a working spouse and no dependents.
We advise families to work with the applicant to define a Gross or before tax wage and agree to that with the new employee. Why is this important?
1. The family who agrees to the take home salary net of all taxes has to make an educated guess as to the employee's tax situation. What other employer would ever agree to this? How many readers have ever completed a tax return that has a goose egg (zero tax due or refunded) as the bottom line?
2. The family who over-contributes the employee's income taxes has in effect given her a raise they didn't intend to give. The refund goes to the employee - never the boss.
3. The family who under-contributes gets asked by the employee at the end of the year to make good on any taxes due - an unexpected budgetary surprise for the family. And if the married housekeeper and her spouse owe taxes, who is to say that isn't because the husband didn't have enough tax withheld?
4. Many families will interpret the 'take home' wage request to mean a wage only after the required taxes have been paid. In household employment, this means the Social Security and Medicare taxes. The family then gives the employee a W-2 at the end of the year reflecting wages and the Social Security and Medicare taxees with no contributions made to income taxes. The employee then has to prepare her own tax returns and pay the appropriate taxes (and sometimes penalties if they haven't made estimated payments). We have seen many domestics promptly quit and find another job when this happens.
HomeWork Solutions will work with registered clients to compute a gross up salary, based on the net or take home pay request. Our recommendation is that the family look at that gross first from their budgetary perspective. Are they comfortable paying the married applicant $38K per year? Maybe their will look harder at the single mom who will only cost them $30K per year? Once the client is comfortable with a budget, our advice is to offer the job based on the Gross wage - and let the tax situation work out however it will.
Our free online tax calculator will help families 'play games' with different wage and withholding status scenarios.
For more information on this and other household employment tax issues, visit the HomeWork Solutions Inc. website.
Household employment is about they only kind of employment where the majority of applicants will state their salary requirements in terms of NET or take home pay instead of GROSS (before tax) wages.
This perplexes the majority of employers. What does the applicant mean? Do they want the employer to pay ALL of their taxes, including income taxes? If so, how does one calculate this given the vast array of personal situations. The housekeeping applicant who is single with two teenagers has a much lower tax rate than the married applicant with a working spouse and no dependents.
We advise families to work with the applicant to define a Gross or before tax wage and agree to that with the new employee. Why is this important?
1. The family who agrees to the take home salary net of all taxes has to make an educated guess as to the employee's tax situation. What other employer would ever agree to this? How many readers have ever completed a tax return that has a goose egg (zero tax due or refunded) as the bottom line?
2. The family who over-contributes the employee's income taxes has in effect given her a raise they didn't intend to give. The refund goes to the employee - never the boss.
3. The family who under-contributes gets asked by the employee at the end of the year to make good on any taxes due - an unexpected budgetary surprise for the family. And if the married housekeeper and her spouse owe taxes, who is to say that isn't because the husband didn't have enough tax withheld?
4. Many families will interpret the 'take home' wage request to mean a wage only after the required taxes have been paid. In household employment, this means the Social Security and Medicare taxes. The family then gives the employee a W-2 at the end of the year reflecting wages and the Social Security and Medicare taxees with no contributions made to income taxes. The employee then has to prepare her own tax returns and pay the appropriate taxes (and sometimes penalties if they haven't made estimated payments). We have seen many domestics promptly quit and find another job when this happens.
HomeWork Solutions will work with registered clients to compute a gross up salary, based on the net or take home pay request. Our recommendation is that the family look at that gross first from their budgetary perspective. Are they comfortable paying the married applicant $38K per year? Maybe their will look harder at the single mom who will only cost them $30K per year? Once the client is comfortable with a budget, our advice is to offer the job based on the Gross wage - and let the tax situation work out however it will.
Our free online tax calculator will help families 'play games' with different wage and withholding status scenarios.
For more information on this and other household employment tax issues, visit the HomeWork Solutions Inc. website.
Friday, March 17, 2006
Nanny Question: What do I do - I didn't get a W-2?
Every spring we receive inquiries from nannies who did not receive a Form W-2 from their employer. This is almost always when the nanny is no longer employed by the family.
The nanny is an employee and is entitled to a Form W-2. Usually the problem is resolved with a phone call or two. If the family digs their heels in and refuses, the nanny has the option to report the wages paid using a substitute form W-2 and filing her tax return. She cannot eFile when using this method. When the IRS gets the substitute W-2 they will first look for a match in their system, and if not found will chase the family for the information and the taxes due.
Specific step by step help for this situation is found at 4nannytaxes.com.
Every spring we receive inquiries from nannies who did not receive a Form W-2 from their employer. This is almost always when the nanny is no longer employed by the family.
The nanny is an employee and is entitled to a Form W-2. Usually the problem is resolved with a phone call or two. If the family digs their heels in and refuses, the nanny has the option to report the wages paid using a substitute form W-2 and filing her tax return. She cannot eFile when using this method. When the IRS gets the substitute W-2 they will first look for a match in their system, and if not found will chase the family for the information and the taxes due.
Specific step by step help for this situation is found at 4nannytaxes.com.
Friday, March 10, 2006
Leaving your baby...
A Peruvian woman in South Florida was hired to care for a baby boy. The family did not do background checks and the nanny was not a legal resident. A few months ago the family installed a nanny cam, and they found some disturbing images of the 'nanny' shaking their 16 month old. They immediately took the baby to the hospital and alerted the authorities. The woman was arrested. This week prosecutors dismissed the charges against the woman, as the quality of the nanny cam tape was not sufficient on its own for a conviction. The child had no serious injury.
A Denver-area family advertised for a nanny on the free Craigslist.com. They hired a young woman from Costa Rica and paid for her transportation to Colorado. She did obtain a visa. The nanny called the parents at work this week to report the 5-month old baby was not moving. The baby is hospitalized in fair condition, with a broken collar bone and evidence of two brain traumas - one new and the other a few weeks old.
Many families hire immigrant women (newly arrived without work visas and SSNs) to provide child care services. The vast majority provide wonderful, loving care. But you cannot background check these individuals. I suspect the Colorado family couldn't even reference check the woman. Babies in particular are not able to alert Mom and Dad to any problems - by the time they are discovered it is too late.
Thorough reference and background checking is the parents' duty. They are responsible to protect their children. Finding an experienced, legal caregiver can take a bit more time and might cost a bit more money. Reference checking takes time and dilligence. Don't short change this - you cannot go back and undo a brain injury.
More information on background checking nanny applicants is found at 4nannies.com.
A Peruvian woman in South Florida was hired to care for a baby boy. The family did not do background checks and the nanny was not a legal resident. A few months ago the family installed a nanny cam, and they found some disturbing images of the 'nanny' shaking their 16 month old. They immediately took the baby to the hospital and alerted the authorities. The woman was arrested. This week prosecutors dismissed the charges against the woman, as the quality of the nanny cam tape was not sufficient on its own for a conviction. The child had no serious injury.
A Denver-area family advertised for a nanny on the free Craigslist.com. They hired a young woman from Costa Rica and paid for her transportation to Colorado. She did obtain a visa. The nanny called the parents at work this week to report the 5-month old baby was not moving. The baby is hospitalized in fair condition, with a broken collar bone and evidence of two brain traumas - one new and the other a few weeks old.
Many families hire immigrant women (newly arrived without work visas and SSNs) to provide child care services. The vast majority provide wonderful, loving care. But you cannot background check these individuals. I suspect the Colorado family couldn't even reference check the woman. Babies in particular are not able to alert Mom and Dad to any problems - by the time they are discovered it is too late.
Thorough reference and background checking is the parents' duty. They are responsible to protect their children. Finding an experienced, legal caregiver can take a bit more time and might cost a bit more money. Reference checking takes time and dilligence. Don't short change this - you cannot go back and undo a brain injury.
More information on background checking nanny applicants is found at 4nannies.com.
Monday, March 06, 2006
2007 Federal Budget Proposals Target the Non-Compliance-Attributed Employment Tax Gap
The Treasury Department reports that non-compliance with employment tax and income tax reporting is a significant part of the current tax gap. Treasury is offering a number of provisions in the 2007 budget proposal designed to help close this tax gap. The IRS reports that under-reporting of income, or failure to report income, accounts for half of the current budget tax gap. Improved employment tax compliance and enforcement would significantly lower the current budget deficits, as better than 98% of taxpayers who receive Forms W2 from their employer properly report and pay their income taxes too.
The 2007 Federal Budget includes significant increases in funding for IRS Audits. This is a cycle that is often repeated. When Treasury revenues are down (as they were in the late 80's and early 90's) audit activity picks up tremendously. Then when the revenues pick up as they did in the late 90's enforcement dropped off. With $300 billion plus budget defecits and an estimated $238 billion non-compliance tax gap attributed to employment and income taxes alone, I expect to see more serious enforcement activities in this direction.
I would remind the household employers that your household employment taxes are reported on your personal Federal Form 1040 annually. If you have a nanny or other domestic and are not reporting and paying the tax on Form 1040 Schedule H, you are submitting a knowingly false Form 1040. These forms are submitted under penalties of perjury, and persons caught not reporting nanny wages may face criminal as well as civil penalties. I have never seen anyone go to jail for non-payment of nanny taxes, but I have seen some very expensive back tax settlements, including penalties and interest.
Consider the following situation I am involved in. Mom was ill for quite some time and an adult child was appointed trustee of Mom's assets. The Trustee paid Mom's housekeeper/companion for a period of almost 20 years. Taxes were never paid, income was never reported. Mom passed away and the housekeeper/companion has filed a claim against the estate for non-reporting of the wages. Apparently the housekeeper who is in her late 60's found that she was ineligible for Social Security and Medicare benefits because of this non-compliance. She has worked as a domestic being paid in cash her entire adult life. Everyone was complicit in the tax avoidance (non-compliance), but the estate faces back taxes, penalties and interest in excess of $100K! $29K of this is the actual tax - the remainder is penalties and interest.
No one likes paying taxes - at least no one that I have ever met! It is important to remember, however, that non-payment of the housekeeper or nanny's employment tax is NOT a victimless action. The family above and their Mom's housekeeper are certainly realizing this the hard way.
The Treasury Department reports that non-compliance with employment tax and income tax reporting is a significant part of the current tax gap. Treasury is offering a number of provisions in the 2007 budget proposal designed to help close this tax gap. The IRS reports that under-reporting of income, or failure to report income, accounts for half of the current budget tax gap. Improved employment tax compliance and enforcement would significantly lower the current budget deficits, as better than 98% of taxpayers who receive Forms W2 from their employer properly report and pay their income taxes too.
The 2007 Federal Budget includes significant increases in funding for IRS Audits. This is a cycle that is often repeated. When Treasury revenues are down (as they were in the late 80's and early 90's) audit activity picks up tremendously. Then when the revenues pick up as they did in the late 90's enforcement dropped off. With $300 billion plus budget defecits and an estimated $238 billion non-compliance tax gap attributed to employment and income taxes alone, I expect to see more serious enforcement activities in this direction.
I would remind the household employers that your household employment taxes are reported on your personal Federal Form 1040 annually. If you have a nanny or other domestic and are not reporting and paying the tax on Form 1040 Schedule H, you are submitting a knowingly false Form 1040. These forms are submitted under penalties of perjury, and persons caught not reporting nanny wages may face criminal as well as civil penalties. I have never seen anyone go to jail for non-payment of nanny taxes, but I have seen some very expensive back tax settlements, including penalties and interest.
Consider the following situation I am involved in. Mom was ill for quite some time and an adult child was appointed trustee of Mom's assets. The Trustee paid Mom's housekeeper/companion for a period of almost 20 years. Taxes were never paid, income was never reported. Mom passed away and the housekeeper/companion has filed a claim against the estate for non-reporting of the wages. Apparently the housekeeper who is in her late 60's found that she was ineligible for Social Security and Medicare benefits because of this non-compliance. She has worked as a domestic being paid in cash her entire adult life. Everyone was complicit in the tax avoidance (non-compliance), but the estate faces back taxes, penalties and interest in excess of $100K! $29K of this is the actual tax - the remainder is penalties and interest.
No one likes paying taxes - at least no one that I have ever met! It is important to remember, however, that non-payment of the housekeeper or nanny's employment tax is NOT a victimless action. The family above and their Mom's housekeeper are certainly realizing this the hard way.
Wednesday, March 01, 2006
Nanny Being Deported
My Google News Alerts have been full of reports this week about a Boston area nanny currently incarcerated awaiting deportation for failure to obtain a valid work visa. The young nanny, a native of Belgium, has worked for the same family for two years. It appears that all taxes have been paid, she has broken no other laws while here. The family she works for adores her; in fact they have unsuccessfully petitioned to adopt her to help her out of the prediciment. Meanwhile, the young lady sits in jail.
The nanny entered the country on a student visa. This visa did not confer work eligibility. Many families willingly overlook the immigration status of nanny applicants, instead seeking the best possible match for their family and their children. This practice is problematic at best.
1. The non-documented individual cannot be properly background screened. In our office, background checks of new staff are a matter of policy. This is part of necessary due dilligence in hiring individuals who will have access to client funds (we process household payroll). How much more important is this due dilligence for individuals who will be left in sole charge of our young, aged, or infirm? Don't these vunerable family members deserve as much, if not more, protection than our money?
2. Families can, and often do, pay the employment taxes on their non-documented staff. This helps the family avoid exposure to tax reporting penalties, but in no way removes their liability for knowing violation of US immigration law.
Proper vetting and background checking of household staff is of vital importance. More information on background and reference checking nannies and other domestics can be found at 4nannies.com.
My Google News Alerts have been full of reports this week about a Boston area nanny currently incarcerated awaiting deportation for failure to obtain a valid work visa. The young nanny, a native of Belgium, has worked for the same family for two years. It appears that all taxes have been paid, she has broken no other laws while here. The family she works for adores her; in fact they have unsuccessfully petitioned to adopt her to help her out of the prediciment. Meanwhile, the young lady sits in jail.
The nanny entered the country on a student visa. This visa did not confer work eligibility. Many families willingly overlook the immigration status of nanny applicants, instead seeking the best possible match for their family and their children. This practice is problematic at best.
1. The non-documented individual cannot be properly background screened. In our office, background checks of new staff are a matter of policy. This is part of necessary due dilligence in hiring individuals who will have access to client funds (we process household payroll). How much more important is this due dilligence for individuals who will be left in sole charge of our young, aged, or infirm? Don't these vunerable family members deserve as much, if not more, protection than our money?
2. Families can, and often do, pay the employment taxes on their non-documented staff. This helps the family avoid exposure to tax reporting penalties, but in no way removes their liability for knowing violation of US immigration law.
Proper vetting and background checking of household staff is of vital importance. More information on background and reference checking nannies and other domestics can be found at 4nannies.com.
