Nanny Tax & Payroll Updates! HomeWork Solutions

The Social Security Administration (SSA), as part of its mission, is charged with maintaining a massive database of employee wage records for future benefits calculations.

The SSA routinely sends employers what are termed "No Match" letters when a W-2 is submitted with a name/number mis-match. Anecdotal evidence in our office suggests that a large number of these letters were mailed to employers in the September/October time frame.

Employers are required to confirm the employment eligibility of new-hires using an I-9 Form before they start work. Many employers wrongly interpret a "no match" letter to indicate the employee is an undocumented alien with a bogus Social Security Number (SSN). They worry that they will run afoul of immigration laws, and some even dismiss the employee.

It is important to understand WHAT the "no match" letter means, how to handle it, and most importantly how NOT to react in such a manner that leaves the employer open to legal penalties.

The SSA posts advice to employers on how to handle a "no match" letter at its website.

A "no match" letter is not a notice of violation of immigration law or tax law. "No matches" occur for a variety of reasons. Marriage or divorce may have occurred and SSA records not updated, there could be a clerical error on the part of the employer submitting the W-2 or the SSA in its handling of the W-2, the employee may have provided an incomplete name or SSN, or the SSN may be fictitious. The purpose of the "no match" letter is to keep the SSA's database accurate and up to date, not enforce immigration or tax laws.

The Department of Homeland Security became involved in this issue in June when it issued a proposed rules change, Safe Harbor Procedures for Employers Who Receive a No-Match Letter, tasking employers to re-check the documents of millions of workers with mismatched Social Security numbers – and fire those who cannot resolve the discrepancy in 60 days. This proposal has NOT been enacted and we expect the issue will be litigated as some point. An employer who relied on employee documentation (Social Security Card for example) that they believed accurate that was later shown to be fraudulent is caught in the middle. On the one hand they face penalties for knowingly employing an illegal alien, on the other hand they are prohibited from firing the employee solely on the basis of the "no match" letter.

Many employers are being proactive by increasing the background checks they do on new hires to include a Social Security Number trace as part of a criminal background check. The SSN trace is a standard component of a 4nannies.com Nanny Pre-employment Background Check.

Labels: nanny social security number, nanny ssn no match, social security records nanny taxes

Q. Are nanny holiday bonuses and gifts taxable?

A. Yes. Basically, according to the IRS, there is no such thing as a GIFT between and employer and an employee. Anything of value given by an employer to an employee is considered compensation, subject to reporting and employment and income taxes.

The only way to skirt the issues of reporting the gift or bonus on the nanny's W-2 is to give her something with a 'de minimis' value - something so small that it is administratively impractical to perform a valuation and include it in compensation. This absolutely rules out CASH and dollar-value gift cards, but might allow other small expressions of gratitude such as a framed photo of the nanny with her charges.

The IRS does not define 'de minimis' by any specific value. A business gift is considered 'de minimis' if the value is less than $25. Many employers use the same measurement - hence the holiday ham or turkey. Gift cards with a dollar value or 'cash equivalent', however, even under $25, would be considered compensation.

Any cash you give to an employee at any time - whether it's a salary, bonus, or holiday gift - must be added to the employee's W-2 income. As a cash equivalent, a $50 gift certificate or gift card is $50 of taxable income.

The holidays and year end are approaching and many of our clients seek guidance on bonus and incentive pay norms for nanny employment. There is no "one size fits all" solution; there are as many creative ways to approach this as there are nanny employers.

A cash bonus is by far the most popular solution - both to families and nannies. HomeWork Solutions' finds that the average year end bonus is one - two weeks of pay. Long-term staff bonuses may be as high as one month's pay. All bonus payments are at the discretion of the employer, and the nanny's length of employment, overall performance, and the means of the employer are all factors in this decision. Bonuses generally reflect the family's appreciation for continuity of care for their child(ren) and recognition for a job well done. A bonus is not a substitute for an annual pay review.

A small personal gift from your child is also appreciated. This might be a framed photo of the nanny with the child, a piece of original 'art' from the child, or cookies that the child helped you bake. Families also sometimes give additional paid vacation in lieu of a bonus (above the agreed upon annual leave). Families who pay anniversary bonuses generally do not pay additional year end bonuses (bonus upon the employment anniversary date).

Occasionally, families will make a contribution to a nanny's retirement account or a tax-free contribution to a 529 educational savings plan for the nanny's dependant child. We recommend you discuss this with your nanny before making the commitment - some nannies find this as paternalistic on the part of the employer. Other nannies are thrilled.

Other incentives include health club membership, airfare home, and payment for all or part of health insurance premiums. Nannies also report receiving gift cards to popular restaurants or day spas, flowers, and other expressions of appreciation. Remember, most bonuses and non-cash compensation (with the exception of health insurance premiums) are taxable income to the employee and should be reported as such.

Here in the greater Washington DC area, we are blessed (or cursed) with below 4% unemployment. Living in DC is expensive, and recent reports indicate that rents are rising more quickly than housing prices.

DC has two other special circumstances: many professionals working for the Federal Government or for firms that do business with the Federal Government and the highest percentage of mothers with children under 2 working outside the home in the country (approximately 60%). The issue of hiring a legal nanny and paying the taxes is stronger here than in any other part of the country. Upwardly mobile professionals don't want to jeopardize their security clearances and get caught violating either immigration or tax laws. This creates tremendous demand for the legal nanny in this market.

Live in salaries for the legal nanny are ranging from $10 - $14 gross per hour, or $450 - 650 per week for a 45 hour work week. Live out salaries have risen even more, with full time nannies earning greater than $40K per year becoming more and more common.

Families are becoming very creative in finding ways to retain these highly compensated nannies. Nanny shares, where two families share the services of one nanny, are becoming more common and parent bulletin boards such as DC Urban Moms are full of nanny share opportunities. A nanny share may be simultaneous (both families' children are cared for at the same time) or sequential (M, Tu, F for one family, W, Th for the other). The nanny hourly compensation is typically 20% higher in a nanny share, but the individual costs to each family are significantly reduced.

The IRS announced November 6, 2006 that the approved mileage reimbursement rate for the business use of a personal vehicle will increase January 1, 2007 to 48.5 cents per mile.

This is the reimbursement rate guideline that most nanny employers utilize to determine the mileage reimbursement for a nanny who uses her personal vehicle to transport the children and run errands.

The recent historical values are:

• January - December 2006 44.5 cents/mile
• September - December 2006 48.5 cents/mile
• January - August 2005 40.5 cents/mile
  

November is typically open season for benefits selection for the following year. If you are considering establishing a Flex Spending Account, now is the time to do it.

A Flex Spending Account allows you to set aside up to $5000 of your income sheltered from Federal and most state taxes to pay for qualified child care expenses. This includes nannies when their income is reported for tax purposes.

This can be very advantageous for nanny employers, significantly reducing the 'expense' of paying the nanny legally.

Let's take a look at it. Assume that the family has an adjusted gross income of $150,000. The $5000 that the family designates to the Flex Spending Account would have been taxed Federally at the 28% tax rate. Assume that the state rate is 7 - 10%. The FICA tax rate is 7.65%. So the total taxes avoided are about 45% of $5000 or $2250.

A typical household employer pays 10% in employment taxes above the employee deductions. In this scenario, the tax savings from the Flex Spending Account will pay the taxes on the first $22,500 paid to the nanny ($432 per week).

You can only sign up for a Flex Spending Account during open season OR if you have a qualifying event during the year (birth/adoption/new dependant).

For more information about the Nanny Taxes, visit the HomeWork Solutions' website.