As part of our month-long series dedicated to Women, Work & Money, CPA Bette Hochberger offers her advice about paying nannies on vs. off the books.
We all know that the cost of childcare is high. After considering how much we will be paying for a nanny or housekeeper, who wants to think about taxes we need to pay in addition to that amount? Wouldn’t it be easier to just pay your help under the table? It is very tempting to avoid these so-called “nanny taxes,” but here’s why you need to pay them, and an overview of how it’s done.
The IRS and the state you live in require you to pay these taxes–it’s the law! And the consequences are severe. By not paying these taxes you are committing tax fraud. You could face penalties, interest, and, in the worst-case scenario, jail time. Your nanny will also face penalties when she fails to report this income on her personal tax return. You will also be cheating her out of her future Social Security, Medicare and unemployment benefits by not paying the taxes.
Now that you are scared straight, let’s go through the process involved in paying nanny taxes.
First you need to get an employer identification number with the IRS. You can do this quickly online at here.
Next you can register with your state to pay for quarterly unemployment taxes. Contact your state department of revenue for specific instructions on how to set up an account to pay for nanny taxes. These state unemployment taxes are calculated as a portion of the employee’s pay (wage base) times a tax rate. They usually amount to a couple hundred dollars a year. Here is a list by state of the 2012 wage bases and tax rates.
Things get a little more complicated at the end of the year because different forms need to be given to different agencies. Here is what you will need to file:
· You need to give every employee who you paid more than $600 a W-2 by January 31, 2013.
· You need to send the W-3 and a copy of the W-2s to the Social Security Administration by February 28, 2013.
· When you file your personal tax return you will need to include Schedule H, which is where you will calculate the payroll and federal unemployment taxes by April 15.
You might want to work with a CPA or payroll service to determine your employee’s wages, if you should be withholding any taxes for her, or if you need to make estimated tax payments.
I know this sounds a little daunting. But remember, it is better to file and make mistakes than not to file at all!
Disclaimer: The articles presented on this blog are general in nature and should not be assumed to be applicable to your situation. In addition, tax law changes daily and the articles on this blog are not updated to reflect these changes. Anyone receiving any part of the information on this blog should not rely on or act or refrain from acting on the basis of any matter or information contained in this blog without seeking appropriate tax, legal or other professional advice. The transmission and receipt of information contained on this blog does not form or constitute a client relationship. Nothing in this blog constitutes legal advice. Opinions rendered by tax professionals are not authority. You agree to hold Bette Hochberger, CPA, its affiliates, principals, employees, representatives, and agents forever harmless from any liability for your use or failure to use the information, advice, referrals, or suggestions provided by this blog at any time. IRS Circular 230 Disclosure: Please be advised that the tax advice contained herein (including any attachments) is not intended or written by the practitioner to be used and cannot be used by the taxpayer for the purpose of avoiding any U.S. tax-related penalties that may be imposed on the taxpayer.
This series was brought to you by a generous grant from the Jewish Women’s Foundation of New York. For more information about the important work they do, go here.
