Nanny Tax & Payroll Updates! HomeWork Solutions

The IRS has announced that there will be no increase next year in the amount of wages a domestic worker can earn without being subject to FICA taxes. In 2007, you can pay a household employee, such as a nanny or housekeeper, up to $1,500 without becoming obligated for Social Security and Medicare taxes.

The wage test, or the amount of wages paid, that obligates the nanny employer (or any household employer) for the withholding and remittance of Social Security and Medicare taxes has adusted several times since 1995. The historical values are as follows:

Year	Annual Wage Test Amount
2006	$1500
2005	$1400
2004	$1400
2003	$1400
2002	$1300
2001	$1300
2000	$1200
1999	$1100
1998	$1100
1997	$1000
1996	$1000
1995	$1000
1994 and earlier	$50 in any calendar quarter

Household employers are NOT obligated on the federal level to deduct or withhold Federal income taxes from their household employee's wages. Most, but not all, states follow the federal rules.

Household employers have a second wage test to determine whether they are subject to mandated unemployment insurance tax contributions. Household employers are subject to the Federal Unemployment Tax (FUTA) when they pay their workers $1000 or more in any calendar quarter. State obligations, separate from FUTA, are triggered at levels between $500 - $1000 in quarterly wages.

Household employers reconcile their federal employment tax obligations annually on IRS Form 1040 Schedule H. A Form 1040 Schedule H must be prepared for any year when either the annual Social Security/Medicare wage test threshold was met and/or the FUTA threshold was met. Generally, remittance of the employment taxes must be made periodically through out the year, either by estimated tax payments or increased withholding from the EMPLOYER's pay check.

For more information on this and other issues surrounding nanny payroll, consult the HomeWork Solutions FAQ

You found a lovely caregiver, Mary, and mutually agreed that you would pay her $400 a week, under the table.

Why take taxes out of her meager income, you rationalize. She probably won't owe any income taxes anyway. And Mary is a single mom, supporting her own child on her income. And why should you do something that makes your childcare expense go up another 10%-20%?

The end of the year comes around and Mary gets to talking with her friends. Anna, another single mom who lives next door, tells her about the Earned Income Tax Credit. It sounds complicated, but basically the EIC lets low wage earning workers like Mary and Anna receive an income tax refund, even if they didn't owe or pay any income taxes. It is a 'refundable, negative income tax.' You need your W-2 form and you need to file a 1040 tax return. Anna got help at the free tax clinic at the library and is getting over $1500 back.

Mary comes to you and announces her change of heart. Can she please have a W-2 so she can file for the EIC also?

The Consequences

Well, Mary was paid $20K last year. The Social Security Taxes on that are $3K. You could have deducted Mary's share, but you weren't going to pay this tax. And then there are the state and federal unemployment taxes. Add on another $400 or so. But wait, the state needed filings every quarter so you are late - tack on another $150 in late fees and interest.

What are you to do? Mary is a fabulous nanny, you have developed a good working relationship in the last year. She will stay late when you need her to without complaining, and your children love her. And finding another nanny is such a chore, one you don't have time for. You agree to file the taxes and take out your checkbook.

The Moral

Don't wait until the end of the year to get unpleasant surprises like this. Start your relationship off on the right foot and begin deducting the taxes from the very beginning.

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Do you wonder if you qualify for the Earned Income Tax Credit? The IRS has a quick qualification tool online at http://apps.irs.gov/app/eitc2005/Return_To_Start.do

Several clients going through the hiring process have called in recent weeks with questions about the legal work status of prospective employees.

Foreign students had applied for employment. Two had Social Security Numbers; only one was legal work. How is a household employer to know the difference?

YOU MAY LEGALLY HIRE A U.S. CITIZEN, AN ALIEN LAWFULLY ADMITTED FOR PERMANENT RESIDENCE, OR AN ALIEN WITH A VALID WORK PERMIT.

You are required to verify your candidate's employment eligibility using Form I-9. Aliens with a valid work permit are eligible for and should have a valid Social Security Number.

A lawfully admitted alien with documents from ICE indicating work authorization (i.e., DS-2019, I-20, I-551, etc.) may apply for and be issued a Social Security Number.

The Social Security Administration will issue cards to aliens not authorized to work if they are lawfully admitted to the US and need the number for a valid non-work reason (as determined by Social Security Administration). The card will be marked to show that the individual can not work. If the alien does work, the Social Security Administration is required to inform ICE.

In this case, the only way the household employer can really tell the difference is to ask to SEE the Social Security Card.

There has been considerable press coverage given to the failure of Congress to inact an increase to the Federal Minimum Wage. Did you know that twenty states and the District of Columbia currently have local minimum wages set higher (in some cases considerably higher) than the federal minimum of $5.15 per hour?

Effective October 1, 2006, four states increased their minimum wage. They are:

• Arkansas $6.25
• Maine $6.75
• Michigan $6.95
• New Jersey $7.15

January 1, 2007 will see further increases in nine states. They are California, Connecticut, Delaware, Hawaii, Massachusetts, New York, Oregon, Pennsylvania, and Washington.

A state by state listing of current minimum wage levels is published at the HomeWork Solutions' website.