Busy, busy, busy. That’s what you are – all the time it seems. So naturally you’ve enlisted help around the house. But you might be in for a huge wake-up call if the IRS comes knocking because you failed to comply with household employee taxes. Read these frequently asked questions to learn more about the so-called “nanny tax.”
I don’t even have a nanny. Does this still apply to me?
Yes! What has been nicknamed the “nanny tax” actually refers to the tax laws for any and all household employees. This may include babysitters, the college kid who cuts your grass, housekeepers, cooks, car pool drivers, and obviously, nannies.
Do I have a ‘household employee’?
The IRS says you have a household employee “if you hired someone to do household work and that worker is your employee.” They’re your “employee” if you control what and how work is done.
Learn how the IRS determines the status of independent contractor versus employee in this publication: https://www.irs.gov/pub/irs-pdf/p1779.pdf
Just consider attempts to bypass the “nanny tax” by saying your employee is an “independent contractor” and giving them a 1099 is not simply tax evasion – it is fraud. Be aware your lack of knowledge will not be a viable reason to excuse you from taxes and penalties. Knowledge is your friend.
Do I have to pay my household employee overtime?
In most cases, yes. However, rules for paying overtime vary from state to state and by type of work and care provided by your employee. According to the FLSA, household employees are considered non-exempt workers and eligible for overtime pay for time worked over 40 hours in a 7-day period. One exception is live-in nannies, but even that exception varies by state.
Can I add my household employee to the company payroll?
No, and this is considered illegal. The IRS does not consider domestic workers – from nannies to maids to yard workers – “direct contributors” to your business.
What happens if I try to dodge this tax?
Noncompliance will result in back taxes and penalties in the thousands! Both state and federal. So, potentially hundreds of thousands of dollars, depending on how far back it’s traced.
Maybe you’re asking yourself, “How will they find out?” An audit is most commonly triggered by a household employee filing for unemployment or in the unfortunate case of suffering a workplace injury. The risk is not worth whatever you think you gain by avoiding the “nanny tax.”
Are there any benefits?
Other than not paying thousands of dollars in back taxes and penalties, below are additional rewards for compliance with household employee tax law.
- Ensure your household employee receives unemployment benefits when you, your children, and/or your household no longer require their services.
- Tax Credits! Be sure to ask your tax professional about the Child and Dependent Care Tax Credit. You may also want to see if your employer offers a pre-tax Dependent Care FSA.
- Ensure your household employee will receive their Social Security benefits upon retirement.
Do I have to manage this myself?
Compliance with household employee tax law is mandatory. Your direct involvement is not. You have two options:
- DIY – There are numerous guides and video tutorials available to help you learn and understand all the rules and requirements for full compliance. See the IRS’ Publication 926, Household Employer’s Tax Guide.
- Outsource – A specialized service. They can handle everything – from onboarding your new household employee to cutting paychecks to submitting the withheld taxes to the appropriate government agency – or they can handle individual pieces of the overall process. Your daily money manager can refer you to a trusted payroll professional.
Don’t delay any longer if you’ve been dodging this tax. The sooner you determine the household worker’s status, the better. Then, if they are your employee, you can take the necessary steps to pay them in full compliance with the law. More questions? Consult your tax professional or give us a call. We have a large network of trusted professionals ready and willing to help.