Paying your caregiver on the books

December 28, 2010

A nurse  takes the blood pressure of elderly patient Hazel Sears at Sears' home in Bethesda, Maryland, September 21, 2007. REUTERS/Jim Bourg Even if you’re not a political candidate running for office, paying your domestic help on the books is the law—and the right thing to do.

Though there are countless individuals who avoid paying payroll taxes on the services nannies, babysitters, housekeepers and eldercare helpers provide, they risk penalties far larger than the effort and cost it would take to comply.

If a former employee files an unemployment or worker’s compensation claim against you, it could trigger a government audit and the penalties could be steep, says Stephen Fuchs, an attorney with Littler Mendelson. You would owe all the back taxes, penalties and interest—and you’d have to pay an attorney, too.

“An employer can be fined $1000 for every 10 days of compensation plus criminal penalties” just for not complying with the workers’ compensation rules, says Fuchs.

A much cheaper option is to pay your domestic help on the books. There are a variety of payroll taxes and fees such as Federal Insurance Contributions Act (FICA) that goes to Social Security (SS) and Medicare, and worker’s compensation. This will amount to at least 10 percent of the payroll depending on the state, says Eli Lehrer, the director of finance, insurance and real estate at The Heartland Institute, a public policy think tank. To be sure, you will pay more than you would if you paid your help under the table.

The upside—in addition to helping your employee accumulate retirement benefits— is that you may be able to get a childcare tax credit or deduction once you are legit. Some families work for companies that offer a pre-tax childcare payroll deduction plan that will allow them to shelter as much as $5,000 to pay their caregiver,  says Candi Wingate, owner of Nannies4Hire.com, an online database that helps families simplify how to look for childcare.

Like all tax-related matters, setting up your domestic help with the proper payroll taxes is a matter of finding, filling out and filing the right forms. This checklist below can help get you started.

Verify employee status. Make sure your domestic help is legally able to work in the U.S.  “The employee should complete a U.S. Citizenship and Immigration Services (USCIS) Form 1-9 no later than the first day of work and send this form to the USCIS,” says Fuchs.

Obtain a Federal Employer Identification Number(EIN). You can do that by filing a Form SS4 with the Internal Revenue Service (IRS).

Fill out the federal W-2 tax form. The federal form, which includes FICA, is simply the W-2. The guidelines are as follows: “If you’re paying $1,700 a year you are liable to pay SS and Medicare,” says Fuchs. “If you’re paying $1,000 or more in a quarter you have to pay unemployment,” he says.

Complete state tax forms. State tax forms will vary as will the rules that direct the filing. For example, “if you live in New York and you employ a domestic for any calendar quarter for $300 or more, you have to file a form NYS-45-MN, quarterly combined withholding and you need to file a New York state unemployment insurance registration—NYS-100,” says Fuchs.

Fill out Child and Dependent Care Tax Credit Form 2441. If you pay for day care expenses for your children you may be eligible for a federal tax credit of up to 35 percent of the cost of day care.

Be aware of Fair Labor Standards Act . This act governs overtime rules, so if your domestic help works more than 40 hours a week, she is eligible for time and a half pay.

No doubt, the paperwork can be onerous. Many people just tap their accountant to help handle the paperwork and pay the quarterly taxes on the overall cost of the childcare. Others will use a nanny tax service. “If one uses a payroll service, then the fees—which range from $10 a month for the very basic service to $50 for the works—is an additional cost,” says Lehrer.

Finally, you might also want to have an employment agreement—in writing. By doing this, you avoid ambiguities and disputes.  “It is a simple straightforward contract, the equivalent of an employee handbook,” says Bob King, attorney and founder of LegallyNanny. A domestic helper, after all, really is an employee. Just because someone works in your home doesn’t make the work any less legitimate. That means, taxes and all.


6 comments

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For more information on taxes and paying your nanny or caregiver, check out…http://tinyurl.com/ydgw3qw

Posted by CandiW | Report as abusive

There was a time in an effort to get more families to do payroll taxes on their household employees, the government was offering the ability to make those payments at the end of the tax year as opposed to quarterly. Does anyone know if this is still feasible in the state of California? Certainly, the paperwork is daunting for most families. It would be good if the IRS made matters a bit easier.

Posted by mperrone | Report as abusive

I work for a company that specializes in processing payroll for domestic employers. I can assure you that paying your employees on the books is the smart and safe way to go. You will never have to fear problems down the road should your employment relationship go sour if you have paid your employee legally. GTM has made paying your employees simple by offering employers several options for paying their employees. GTM also handles registering you as an employer with the state and federal government and maintains your reproting and payments with no work or worry for the employer. At the end of the day there is no better feeling than knowing you have done the right thing! Feel free to log on to our website and view our options. www.gtm.com

Posted by Grassmann | Report as abusive

It is crucial that nanny taxes are paid on time (http://bit.ly/f5XhTL).

Posted by tax4nanny | Report as abusive

Paying your payroll taxes is very important. Don’t be late and don’t get behind.

http://www.blueridgetaxes.com

Posted by chartman101 | Report as abusive

Payroll quarterly reports are due near the end of every April, July, October, & January for the previous quarter. Remember even if you are paying your taxes electronically to the Internal Revenue Service for payroll tax payments, you must still file the federal quarterly report detailing wages and taxes paid.
http://www.smarttaxcpa.com

Posted by SmartTaxCPA | Report as abusive