Avoid “Nanny Tax” Pitfalls


Remember Zoe Baird?  She was nominated for Attorney General.  Everything was going well until it was disclosed at her Senate confirmation hearings that she had failed to report money she paid to her domestic help.  The media called it “Nannygate”.   Years later, there was speculation that the issue influenced Caroline Kennedy’s decision to pull out of contention for New York’s vacant United States Senate seat and Timothy F. Geithner’s nomination for Treasury secretary hit a snag over an issue relating to a housekeeper.

The practice of paying domestic help off the books is still widespread. Did you pay a babysitter working in your home more than $1,700 in 2011? Unless that babysitter is your parent, spouse, under-age-21 child or someone under age 18 whose principal occupation is not household employment (a student, for example), then you owe the “Nanny” tax.

Any time you hire someone to work in your home that you pay directly AND whose total payments in the calendar year meets the IRS household employment threshold of $1,700, they must receive a W-2 from the employer (family) and the employer must pay the payroll taxes. It makes no difference whether the employee is full time, part time, or simply temporary. The employer payroll taxes include Social Security, Medicare, federal Unemployment and state unemployment taxes. The employee withholding includes Social Security and Medicare and possibly, federal, state and city income taxes.

If you’re thinking, “Why should I pay nanny taxes? No one else pays them and I’m not running for public office,” think again.

The IRS will catch you. Form 1040 requires you to check the box for Schedule H if you owe household employment taxes.  Schedule H asks “Did you pay anyone working in your home $1,700 or more?” If you check yes, the IRS looks for your nanny tax payments. If you say no, you compromise your federal income tax return and may be audited. Furthermore, if you pay an employee working in your home $1,000 or more per calendar quarter, you must pay nanny taxes and file them quarterly.

Of course, there are several other ways you can be “caught” by the IRS.

  • Your employee doesn’t work out and you fire her. The former employee may apply for unemployment benefits. If you haven’t paid nanny taxes, the state unemployment office will fine and penalize you, and report you to the IRS.
  • Your employee becomes disabled, cannot work and files for social security disability benefits. If you haven’t paid nanny taxes, the Social Security Administration will impose back taxes, interest and penalties.
  • Your employee files a tax return and includes the wages from your employment. If you have not provided a W-2 to the employee, the IRS will fine and penalize you for the back taxes.
  • Your employee retires and applies for Social Security benefits.

There is no statute of limitations for failing to report and pay federal payroll taxes.

You are not required to withhold income taxes unless your employee asks you to and you agree. If you do not withhold income taxes, your employee must pay these taxes. If your employee pays these taxes themself, they may need to make quarterly estimated tax payments.

The Internal Revenue Code maintains that the immigration status of your nanny or other employee has no bearing on your obligation for employment taxes.

Since so many households employ illegal immigrants as nannies, housekeepers or groundskeepers, noncompliance with the Nanny tax is high. With all of the various proposals being discussed in Washington with regard to immigration status include either a Guest Worker program, an amnesty program with a citizenship path for illegal immigrants already working in the U.S., or both, there is a greater likelihood that applicants for immigration legalization will be required to disclose their employment history in the U.S.

It is expected that all immigrants applying for a Green Card or other legalized status will be required to document tax compliance. All plans include an examination of tax return records going back a minimum of 3 years. The illegal immigrants will be highly incented by the promise of legal status, and it is expected there will be significant pressures on current employers who have been paying these immigrants ‘under the table’ to come clean and catch up on tax payments so the immigrant can take advantage of a legalization program. Remember, it is the household EMPLOYER who pays the employment taxes AND provides the W-2 forms.

Once you’re paying on the books, you can use a flexible spending account through your employer to cover up to $5,000 in eligible child or elder care expenses each year. If you don’t have access to such an account, you may also be eligible for the federal Dependent Care Tax Credit.

Getting it wrong can cost you serious money. We prepare back tax returns. Call for fees.  See our link in the Resource section