Did you hire a summer nanny to keep an eye on the kids while school is not in session? Do you have a caretaker or a health aid? Depending on the specifics of your situation, you may be subject to the tax and reporting rules surrounding household employees. This often-overlooked bookkeeping and payroll tax requirement can cause a tangle of tax problems if not handled correctly. Could you be impacted?
Nanny tax explained:
In an effort to capture income from household employees, the tax code requires you to obtain employee information, pay the related state and federal taxes, and withhold taxes for anyone you employ around the house. The requirement comes into play if you pay any one individual $2,300 or more (in 2021). You must then submit a W-2 for each of these household employees.
Who is covered?
The household workers typically covered by this law include:
The most important question: employee or not an employee?
Before you panic, first determine whether your help is an employee or not. If your help is not an employee, the nanny tax rules DO NOT apply. What does the IRS look for in making the determination?
- Who controls how the work is done? If the worker clearly makes their own decisions around things like when they arrive, how many hours they work, and the order in which work is done, the person is self-employed and not your employee.
- Whose tools are used? If the worker’s own tools are used, they are more likely self-employed and not your household employee.
- Work exclusively for you? If the worker has a number of customers, they are less likely to be your household employee.
- Does an agency supply the worker? If an agency supplies the worker and controls what work is done and how it is done, the worker is not your employee.
- Daycare services at an offsite location. If your childcare is conducted in the worker’s home, that worker is generally not your employee.
Be smart around your management of household employees:
- Have your help become incorporated. The reporting rule only applies to hired individuals. If your household help is in a LLC or Sub chapter S-Corporation, it is up to that company to employ the worker and pay their employment taxes.
- Be aware of the annual limit. Make sure your total payments do not exceed the reporting threshold each year.
- Determine if the hired help are truly employees or self-employed.
- Rotate services. If you have help with yard work consider employing a number of helpers to make sure no one person is paid above the reporting threshold.
- Make the determination now. If you think you may have a household employee, evaluate your situation as soon as possible. Waiting until the end of the year can create a reporting problem for tax payments due during the course of the year.
- Follow the IRS checklist. If you know you are hiring a qualified household employee, here is a brief checklist provided by the IRS to help keep you out of harm’s way:
- Find out if the person can legally work in the U.S. (form I-9)
- Find out if you need to pay state taxes
- Withhold social security and Medicare taxes
- Withhold federal income tax if required
- Determine if you are required to pay federal and/or state unemployment taxes
- Determine the payment method and make tax payments
- Get an employer identification number (EIN)
- File W-2s each year and provide copies to your household employees
- File household employment tax form with your annual tax return
- Keep good records
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.