Nanny Tax & Payroll Updates! HomeWork Solutions

2007 is coming to a close and nanny employers (all household employers for that matter) need to attend to year end tax reporting. Here are some tips for a trouble free tax year.

1. Do you have all tax ID numbers? At a minimum you need a Federal Employer Identification Number (from the IRS) and in most cases a state Unemployment Tax Account Number (from the state's Department of Labor or Bureau of Employment Security).
   
   Filing tax documents with missing ID numbers will virtually guarantee errors in recording your information.


2. Verify your employee's personal information, include the spelling of his/her name as it appears on the Social Security Card AND the Social Security Number. If you have employees who separated during the prior year, make sure you have a current address for mailing the form W-2.
   
   A mis-match between the employee name and Social Security Number will generally result in your becoming a pen pal with the Social Security Administration at a future date. This may also delay the processing of any income tax refund your employee may be due.


3. Double check all your calculations. Correcting year end forms after they have been submitted is not a pleasant task. The Social Security Administration provides a 28 day grace period between when you must provide W-2s to your employees and when you must file with SSA. Allow your employees to review their W-2 and come to you with any errors before you mail off the SSA copies.

HomeWork Solutions has a variety of service options available to assist nanny employers with employment tax compliance.

Do you withhold income taxes from your employee's pay? If so, please check that your withholding rates have not changed between 2007 and 2008.

Silvia Medina came to New York City in 2000, without papers, and two years later took a job working as a nanny for a NYC labor relations official, Michelle Jung, and her husband John McCullough. She cared for two children and performed a variety of general housekeeping tasks.

Medina became very ill in June 2006 and required hospitalization. Medina's employers paid her medical bill, and then immediately fired her without notice or severance, according to Medina.

Today, with legal assistance from MFY Legal Services, Medina is suing her former employers for unpaid wages and damages. Her claim is that she was not paid at the minimum wage for all the hours worked, and she was not paid for overtime even though she routinely worked a 60 hour week.

Claims such as Medina's are becoming increasingly common. Employers are at risk if they do not routinely maintain records of days/hours worked by their household worker, and maintain meticulous payroll records. Nannies and housekeepers must be paid for ever hour worked, and the employer's records should include the nanny's hourly pay rate. HomeWork Solutions has a free Hourly Pay Rate Calculator tool available to assist employers in translating their intended weekly salary into the appropriate hourly rate, taking into account such factors as state overtime regulations and the residential status (live in or live out) of the employee.

Approximately 1.5 million American families fail to pay their Nanny Taxes, cheating their nannies and housekeepers of retirement and unemployment benefits. This number has steadily increased over the last decade, despite Congress' efforts and the fact that these families commit perjury on their family tax returns every year.

Prosecution for failure to file and pay the nanny taxes is rare. Why should you pay the nanny taxes anyway?

1. Statue of Limitations? There is NO statue of limitations for failure to pay federal employment taxes. The family who fails to collect and pay the federal employment taxes becomes responsible for BOTH the family and the employee contributions if challenged at a later date. We recently assisted a widow's estate with a $95K employment tax nightmare - when grandma passed on, her former housekeeper of 18 years filed for Social Security Benefits, only to find that no earnings had been reported for close to 2 decades.


2. Nanny taxes as a weapon in a divorce - really! Seeking to improve her property and maintenance settlement, a wife threatened to turn over her soon-to-be-exes income tax returns to his law firm demonstrating that he didn't pay his nanny taxes! Tax fraud routinely results in disbarment. The attorney engaged us to assist with filing 3 years of amended tax returns to remove the threat.


3. Whoa! Your housekeeper was injured on the job and requires medical care. Your homeowner's insurance does not cover your employees - that is what you need worker's compensation insurance for. You can only obtain this coverage when you are paying the nanny or housekeeper legally. Without the proper insurance, the family will be held liable for medical costs, rehabilitation costs and lost wages. Sadly, we speak to at least one family a year facing thousands of dollars in nanny medical expenses they never even considered. By the time the accident occurs, it is too late to get the insurance coverage.


4. Valuable tax credits! Your nanny's payroll and associated taxes may be used to qualify for special tax treatments afforded to child care expenses. The positive benefit of these tax breaks can often completely off-set the family's expense for tax compliance.


5. Your nanny is likely to file for unemployment benefits when the relationship ends. This is the most common way families get 'caught' cheating on the nanny taxes. The nanny needs these benefits to tide her over until she finds another job. In the case of the live in nanny who is let go, her need is even more dire. She won't think twice about filing for these benefits and the possible consequences to her former employer.

I have provided nanny tax compliance services for 15 years. I assure you, in every one of the client profile situations above the family really thought that not paying the nanny taxes was not a big deal - until it came back to haunt them.

Labels: nanny tax avoidance, nanny tax fraud, nanny tax risks