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When things change, we're on it. If it concerns household employment,
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Nanny Hiring Tip: Capitalizing on Tax Breaks

by Breedlove August 14, 2013

When families start the nanny hiring process, there are lots of questions about the cost.  Are there tax breaks available?  Which one should I use?  Are there income restrictions?  How much should I budget?

 

Here’s what you need to know. 

 

All families who pay their employee legally are entitled to at least one tax break, regardless of their income level.  The only restrictions are that the children under care must be under age 13 and both parents must pass the “work-related test,” meaning each is employed, looking for employment or a full-time student.

 

For many families, the tax savings offset most of the employer tax cost.  For some, the savings can even exceed the cost of their employer taxes (yes, it’s possible to come out ahead financially).

 

Here are the two childcare tax breaks: 

 

1) Dependent Care Flexible Spending Account (FSA). Many companies offer their employees the option to contribute up to $5,000 of their pre-tax earnings every year to an FSA. Because paying nanny taxes qualifies as a childcare expense, you can take advantage of paying these expenses tax-free. Depending on your marginal tax rate, this tax break can save as much as $2,300 per year.  If you think your company offers an FSA program, we recommend that you talk to the benefits manager about enrollment.  Open enrollment usually occurs in the fall for the subsequent tax year, but there are exceptions for life-changing events such as the birth of a child that may allow you to enroll in this tax year.

 

2) Child and Dependent Care Tax Credit. Household employers are entitled to a 20% tax credit on childcare expenses of up to $3,000 for one dependent ($600 savings) or up to $6,000 for two or more dependents ($1,200 savings). You can claim this tax credit by completing IRS Form 2441 as part of your personal income tax return at year-end.

 

Notes:

If you only have one dependent under age 13, you’ll have to choose between the two tax breaks.  For most families the FSA is the best option. 

 

If you have two or more dependents under age 13, you can take advantage of both tax breaks if your childcare expenses were greater than your FSA contribution. Excess expenses (up to the $6,000 expense limit) may be applied to the Child and Dependent Care Tax Credit on Form 2441.

 

To calculate your employer budget, visit our free Nanny Tax Calculator.  With these significant breaks, most families find that paying a nanny legally is not only the right thing to do, it’s also the wise thing to do.

Last Minute Tax Reminder: Take Advantage of the Childcare Tax Credit

by Breedlove April 10, 2013

The April 15 tax filing deadline is less than a week away and many household employers are racing to get their taxes filed on time. Along with their personal 1040 and Schedule H, household employers also need to make sure they are taking advantage of the Child and Dependent Care Expenses tax credit (IRS Form 2441) if they qualify. According to the most current IRS statistics from 2010, only 7 million people file this form nationwide.

Families qualify to file Form 2441 if they had childcare expenses for a child under 13 and both spouses work or are full-time students. Unlike other tax credits, there are no restrictions based on income level. The tax credit is 20% for up to $3,000 of childcare expenses ($600) for families with one child and 20% for up to $6,000 of childcare expenses ($1,200) for families with two or more children.

Some families may not have taken advantage of this tax credit in the past because the name sounds familiar to the Child Tax Credit. However, this is a completely different credit families with children can take to reduce their federal income tax and has no bearing on whether a family is qualified to file Form 2441.

For more information about the Child and Dependent Care Expenses tax credit, or other ways to save money, visit our Expert Advice page.

Don't have your W-2 yet? We have a solution

by Breedlove February 8, 2013

Now that the IRS is processing personal income tax returns, many people are getting their tax documents in order and preparing for a (hopefully) big tax refund. But there are also many of you who may be stuck because you haven’t received your Form W-2 from your employer yet. So, what do you do?

The best thing to do is ask your employer. They’re supposed to send you your W-2 by January 31. The IRS says if they sent it by mail, it could take up to two weeks, so there’s a chance it could still be in transit.

However, if your employer says they never prepared one for you (or they provide you with a Form 1099 instead), you should remind them that you are considered a household employee and are required to have a Form W-2 from them so you can file your income tax return. If that doesn’t work, you will have to claim your wages and taxes by filing your income tax return without a W-2.

If you earned less than the FICA threshold of $1,800, report your wages on line 7 of Form 1040 along with the letters "HSH," which is the code for household employment. If you earned more than $1,800, you will have to file Form 4852 which serves as a substitute for the W-2. Finally, if you received a 1099, you need to file Form 8919 to figure and report your share of the uncollected FICA taxes due on your compensation.

Because of the potentially expensive tax problems this could create for you and your employer, we advise you to do everything you can to educate your employer on the tax process for household employers (a.k.a. the "nanny taxes")...most busy families simply are not aware of their responsibilities.  You might want to share our helpful literature and videos -- and also let them know that we're happy to provide a free personalized phone consultation if they'd like to call. We’re here to help!

A Gift of (Breed)love

by Breedlove December 21, 2012

We got a call from a prospective client yesterday that warmed all of our hearts.  He came to us after hearing good reviews of our service from several friends.  He liked everything he heard during our free phone consultation so he decided to join the service.  We're thrilled to serve him.  But that's not the best part.

 

Before he hung up, he said he was "giving the gift of Breedlove" to his wife...she has been handling all of their "nanny tax" obligations (payroll, quarterly state employment tax returns, Form W-2, Schedule H, federal 1040-ES payments, etc.) for several years and he wants to surprise her with our service as a Christmas present.  He doesn't want her to have any more paperwork, government correspondence or deadlines to worry about.

 

Note: The IRS estimates the average household employer should budget 50-55 hours per year on payroll & tax compliance...he's excited to give her a lot more precious free time.

 

We're all so flattered to be considered present-worthy!  It made our day...heck, our whole week.  So, we made a special hand-made card that he can put under the tree. Can't wait to hear how she likes it! 

 

Happy holidays from all of us at Breedlove!

Tax Deadlines Approaching

by Breedlove January 24, 2012

If you employed a domestic worker during 2011 and paid $1,700 or more, there are two important "nanny tax" deadlines that are quickly approaching:

 

Your state requires household employers to file employment tax returns by January 31.  (Your state may also require you to file an Annual Reconciliation as part of the year-end process).

 

You are required to prepare Form W-2 and distribute it to each employee no later than January 31.  (Important Note: Don't use Form 1099, which is for independent contractors.  The IRS has ruled that domestic workers should be classified as employees and misclassifying your employee as an independent contractor can expose you to felony tax evasion charges and expensive penalties).

 

If you're a Breedlove client, we have all your obligations covered.  If you're not a client and you want help meeting the state and federal deadlines, just complete our Secure Online Registration and we'll take care of everything. 

 

FICA Reporting Threshold Will Increase to $1,800 in 2012

by Breedlove November 3, 2011

In 2011, if a family employs a household worker and pays him/her less than $1,700 in the calendar year, the family is not obligated to withhold FICA taxes (Social Security and Medicare) nor are they required to pay the employer portion of FICA for that individual.  It's generally referred to as the "Casual Babysitting Exemption."

 

In 2012, the threshold will increase to $1,800 in a calendar year.

 

Please keep in mind that, even though you may be exempt from FICA reporting, you may still be required to file unemployment tax returns if the total paid to all employees combined exceeds $1,000 in a calendar quarter (a few states have thresholds that are even lower).

 

Finally, whether you have to file or not, you are legally still an employer so make sure you adhere to all local, state and federal labor laws.


Household Employment Expertise Made Simple & Free

by Breedlove July 11, 2011

After handling all the household employment (a.k.a. "nanny tax") obligations for almost 20,000 families over the past two decades, we distilled our specialized knowledge into a brief, simple booklet entitled "The Household Employer's Financial, Legal & HR Guide."  It outlines the obligations, the problem areas to avoid, and how to capitalize on all the tax breaks.  For a free copy, just drop us an email info@myBreedlove.com

 



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