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When things change, we're on it. If it concerns household employment,
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Changes to Healthcare Law May Benefit Families

by Breedlove August 20, 2013

A new era of health insurance is set to begin on January 1, 2014. The Patient Protection & Affordable Care Act (also known as "ObamaCare") will usher in dramatic changes to coverage requirements and policy procurement. This month, The Legal Review takes on a different look as we demystify our new universal healthcare system and examine its effect on household employment.
 
Coverage Requirements
 
Next year, every U.S. citizen will be required to have health insurance coverage - either their own policy or through a spouse, parent or group plan. The consequences for not having coverage will be a fine, which will become increasingly punitive over the next few years. Unfortunately, many household employees currently don't have health insurance - due to expense, difficulty obtaining coverage or simply a lack of perceived need.
 
Beginning October 1, 2013, each state will provide access to an online health insurance exchange, which will provide a marketplace where individuals can compare health insurance plans and purchase a policy that suits their needs. Links to the exchange in each state can be found on our state-specific web pages.
 
How Employers Can Help AND Save Money
 
While household employees will be required to have health insurance coverage, household employers are NOT required to offer or pay for the coverage. However, Congress has created incentives for employers to make health insurance contributions part of the compensation package.
 
First, the employer contribution is considered non-taxable, so neither the employer nor the employee is required to pay any taxes on that portion of the compensation.
 
Second, families are eligible for a health insurance tax credit (HITC) - as long as they pay for at least half of their employee's health insurance premium and the annual wages they pay to the employee (or average annual wages if they have more than one employee) is less than $50,000. Currently, the HITC provides a tax credit of up to 35% of the employer's health insurance contributions. However, this credit will increase to a maximum of 50% starting in 2014.
 
The combination of non-taxability and tax credit make employer-paid health insurance a very attractive benefit option for most families. Take a look at the following example to see how a nanny's income and a family's cost can be affected by the family covering the full cost of a health insurance policy at $300 per month (or $3,600 annually):

 

 

As you can see, the nanny takes home more money and the family saves money. It's a win-win for both family and caregiver.
 
How Families Can Pay for Insurance and Receive the Credit
 
Generally, a household employer is not able to set up a group health insurance policy to offer their employee. Instead, the employee should find and purchase an individual policy of their choosing. The family may pay up to the entire monthly premium for their employee and should make payments directly to the health insurance company in order to keep accurate records of their contributions. At tax time, the family will file Form 8941 with their personal income tax return to claim the tax credit for their health insurance contributions.
 
What if the Employee Purchases Insurance on Their Own?
 
If a family does not wish to contribute to their employee's health insurance premiums or the employee wishes to purchase coverage on their own, they can still be eligible for a subsidy to offset the financial burden if they purchase a policy through their state's exchange. The amount of the subsidy is based on the employee's income level and will usually be credited to them at tax time. (In certain circumstances the employee may be able to receive their subsidy earlier)
 
How We Can Help
 
At Breedlove & Associates, we're always happy to help our clients understand the tax benefits of including health insurance in the compensation package and how to handle the payroll logistics. Saving families and caregivers money is our favorite part of the business!

Back-to-School Tip: NannyShare Arrangements Make Childcare More Affordable

by breedlove August 15, 2013

We talk to a lot of families who express a desire to upgrade their childcare situation from a daycare to a nanny.  They cite flexibility of hours, quality & consistency of caregivers, exposure to illnesses and convenience as the primary reasons to make the transition.


With 2 young children, the cost of a nanny can be reasonably close to the cost of daycare – so the decision is pretty easy.  With 1 child, a nanny is quite a bit more expensive, making it difficult for many families to make it work financially.

For this reason, NannyShares have become very popular.  By splitting the cost of a nanny, more and more families are finding that high-quality in-home care is within reach. 

But, to make it work, both families need to work together to build consensus on a wide variety of issues, including diet, activities, schedule, discipline, communication, compensation and more. 

From a legal perspective, it’s important to know that each family in a NannyShare is considered an employer and, therefore, each needs to handle the “nanny tax” obligations separately.  The good news is that each family gets to take advantage of the childcare tax breaks, which typically more than offset the employer tax costs in NannyShare situations (visit our free nanny tax calculator for an estimate of your employer taxes and tax breaks).

The bottom line is that NannyShares can be a great solution for hard-working families trying to get the quality of a nanny at a price that is comparable to daycare.

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.

Back-to-School Tax Tip: Worker Classification and Your Tax Responsibilities

by breedlove August 13, 2013

It may seem like summer vacation began a couple of weeks ago, but back-to-school season is here and many parents are getting a head start on their nanny hiring process. Here at Breedlove & Associates, we want to arm you with all the information you’ll need to budget correctly and make the right tax and payroll decisions.


The first thing to understand is that the IRS considers nannies, senior caregivers, housekeepers, etc. to be employees of the families for whom they work. Some families make the mistake of misclassifying these workers as independent contractors (by providing them with a Form 1099 at the end of the year).  This legal error can be very expensive for both parties – the employer is exposed to tax evasion charges and large IRS penalties while the employee has a higher tax rate and fewer benefits. Instead, families should report wages paid to their employee using Schedule H and provide her with Form W-2 at year-end.

You may be wondering how much to budget for employer taxes. The good news is, thanks to tax breaks, it’s probably much less than you think. The employer taxes fund benefits for the employee (i.e. Social Security, Medicare, Unemployment) and average about 9% of the gross wages. The childcare tax breaks can offset most of that 9% cost – some families even come out ahead. There are several factors that will affect your individual employer budget. Use our free Nanny Tax Calculator for a quick estimate. Most people are pleasantly surprised.

Finally, there’s quite a bit of confusion surrounding the terms “gross wages” and “net pay.” Gross wages refers to the amount paid to an employee before her taxes have been withheld. The government requires that all compensation be reported in terms of gross wages. Net pay (a.k.a. “take-home pay”) is the amount the employee gets each payday after taxes have been withheld. When discussing compensation with a prospective employee, we strongly encourage families to use gross wages. If you want to help an employee understand what her net pay will be, feel free to run scenarios with her using our Employee Paycheck Calculator or print out sample paystubs.

Hopefully, these tips and tools will be helpful. If you have questions, please don’t hesitate to give us a quick call at Toll Free 1-888-273-3356. We’re here to help.

Business Payroll is no Place to Pay a Nanny

by Breedlove July 10, 2013

We often speak to families who think that adding a household employee to their business payroll provides an easy, one-stop solution. However, doing this is illegal in almost all instances and there are several snags that can come up when household and business payroll are not maintained separately. The following case illustrates one of them.

 

The Mistake

A family in Colorado hired their first nanny to care for their two children. The family owned a small business with 10 employees and had been told it would be okay to add the nanny to their company’s payroll. They wanted to “make things easy” as well as provide the nanny with access to their company’s healthcare plan. The placement agency the family worked with thought this seemed out of place and advised the family to call Breedlove & Associates for a second opinion. Unfortunately, the family never called and set their nanny up as an employee of their business.

 

The Law

Business owners are allowed to take a business tax break on their company’s payroll expense because the employees are direct contributors to the success of the business. The IRS has ruled that household employees are not direct contributors to a business and, therefore, their wages – as well as the accompanying care-related tax breaks – must be handled through the personal tax process. In addition, household employees cannot be filed with a business’ employment tax returns (unless it is a sole proprietorship or for-profit farm).

 

Furthermore, company group health insurance policies may not include non-employees. If a household employee is interested in health insurance, the nanny must obtain an individual policy. However, just like a commercial employer, a household employer can contribute up to 100% of the employee’s health insurance premiums and have it be considered non-taxable compensation. This means that neither the family nor the nanny would pay any taxes on that portion of her compensation. As an added bonus, as long as the family covers at least 50% of their household employee’s health insurance premiums and their nanny makes less than $50,000 a year, they can take a tax credit of up to 35% of their total yearly contribution.

 

The Mess

Approximately six months into the relationship, the nanny broke her ankle while skiing one weekend. She required surgery and an overnight hospital stay which resulted in around $20,000 in medical expenses.  The insurance company ultimately discovered she was a nanny and refused payment on the grounds that she was not an employee of the company and, therefore, not covered by the group health plan. The nanny was distraught with the thought of having to cover these medical bills and contacted the family.

 

Having remembered the conversation they had with their placement agency, the family contacted Breedlove & Associates to try to find a solution. A consultant informed them that their nanny needed to have an individual health insurance policy in order to be covered for the majority of her medical expenses. Additionally, the family needed to establish themselves as household employer with the IRS and Colorado state tax agencies to accurately report their nanny’s wages and take the correct tax deductions.

 

The Outcome

The family felt horrible that their payroll mistake caused their nanny so much stress. Because they were so happy with the work she was performing and because it was their mistake, they paid their nanny’s medical expenses. The family also had to pay their CPA to amend their business tax returns for the previous two quarters in order to reverse their illegal payroll deductions.

 

Because their CPA was not familiar with household employment taxes, the family signed up with Breedlove & Associates to process their nanny’s payroll going forward. We filed two quarters of late Colorado state income and state unemployment tax returns to catch the family up on their tax obligations. The family had to pay interest on their late tax payments, but we were able to get the state penalties waived for them once we explained why the tax returns were late.

 

The family continues to employ the nanny and even pays for 75% of her health insurance premiums.

 

How the Whole Thing Could Have Been Avoided

Had the family taken their placement agency’s warning about adding the nanny to their business payroll, they would have avoided this extremely expensive experience.  As the husband said to the Breedlove & Associates consultant who helped him, “My gut told me to call you months ago, but I convinced myself that it was not a big deal. I wish I had it to do over again!” Many well-intended families have made this mistake based on advice they received from a trusted source. This case serves as a reminder that tax and employment law for households is unique and outside of the core competencies of most tax professionals.

We Are Here to Help - Everyone!

by Breedlove July 9, 2013

As millions anticipate wedding bells on Modern Family, we’ve already started to experience the impact of the Supreme Court’s recent decision on the Defense of Marriage Act (DOMA). Last week, a same-sex married couple that files jointly on the state level was able to complete the filing status portion of our registration without any confusion.

If you need to change your filing status, just give us a call and we’ll be happy to make the adjustment for you.

FSA Window for Life-Changing Events

by Breedlove June 6, 2013

Did you know that in the U.S. there are more babies born during the summer than any other season of the year?  It’s one of the reasons that demand for professional childcare reaches a peak during the summer. So, it’s a good time to remind everyone about FSA enrollment. For families who have just given birth – or are about to welcome a new member to their household – this edition of The Legal Review will share a simple tip worth as much as $1,500. 

The Situation
A couple gave birth to their first child on April 19. In early May, they began working with a local placement agency to find a nanny so the mom could go back to work after Memorial Day. With about a week to spare, they found the perfect nanny. As the family worked with the agency to finalize the employment paperwork for their nanny, the family’s placement counselor provided them with information about their tax and payroll obligations as a household employer and shared the good news about tax breaks. The family told her that they had not enrolled in their company’s Flexible Spending Account but would do so in the subsequent year.

Having read through the Expert Advice section of our website, the counselor remembered that there were some special opportunities to enroll in the middle of the year if you just had a baby.  So, she advised the family to talk to their HR people as soon as possible.

The Law
Families with childcare expenses are entitled to tax breaks to help offset some of the costs.  There is no income restriction on the tax breaks, so all families qualify as long as their children are under age 13 and both spouses are working, looking for work or are full-time students.

The most lucrative tax break is the Dependent Care Account (also referred to as “Flexible Spending Account” or “FSA” as part of a company’s “Cafeteria Plan”). If one of the spouses has access to this benefit, the family will be able to pay for up to $5,000 of childcare expenses using pre-tax dollars. That means the family has no taxes on that portion of their income. This benefit saves most household employers between $2,100 and $2,300 per year, depending on the state they live in and their marginal tax rate.

Enrollment in the FSA is limited to once a year (most companies do open enrollment in the fall for the subsequent tax year). However, there is a 30-day window after “life-changing events” where the family can enroll mid-year and the birth of a child is one of the qualifying events. If families miss that window, they can still take advantage of the Child and Dependent Care Tax Credit when they file their federal income tax return. However, this tax break saves a maximum of $600 per year for families with one child or $1,200 per year for families with two or more children.

The Outcome
Upon speaking to the HR person, the family learned more about the 30-day window for life-changing events and they were able to enroll in the FSA program for the current tax year. Given the family’s marginal tax rate, they will be able to take advantage of $2,100 in tax savings for the 2013 tax year.

Without that tip from the counselor, the family would have missed the enrollment window, which would have forced them to settle for the Child and Dependent Care Tax Credit’s $600 worth of tax savings. That $1,500 of additional savings will pay for a lot of diapers and baby food!

How to Ensure Families Maximize their Tax Savings
Unfortunately, it is extremely common for families to miss out on enrolling in an FSA after the birth of a child. As first-time parents become first-time employers, there is a lot of new information to process and 30 days is not a lot of time to know everything about being a household employer.

That’s why we offer a New Employer Orientation free of charge. This 10-minute, no-pressure, no-obligation phone call allows a Breedlove & Associates tax expert to assess a family’s unique situation and provide guidance on all the tax and labor law issues that will come into play for them. Whether they decide to use our comprehensive payroll, tax and HR service or not, this guidance will likely save them thousands of dollars and dozens of hours.

How to Handle Payroll When a Nanny Travels with the Family

by Breedlove May 9, 2013

The summer months are right around the corner and many families are already planning their vacation schedule. For those who take their nanny along to watch the kids, this edition of The Legal Review addresses a common labor law mistake.

The Situation

The Kellogg family hired a nanny through a local placement agency to care for their three sons. The family needed someone who would be able to travel with them for at least two vacations during the summer. The agency was able to set the Kelloggs up with an ideal nanny who was eager to accept the position, in part because she had never been out of the state before and liked the idea of traveling to new places. The agency also recommended the family call Breedlove & Associates because traveling with a nanny can be tricky for families unfamiliar with labor law. The Kelloggs politely declined as Mr. Kellogg had worked in financial services his whole life and felt comfortable handling the nanny’s payroll and taxes.

The Mistake

The first family vacation was a week-long trip to Disney World. The nanny was excited to go and assumed she would have some free time of her own. To her surprise, she worked much more than normal – instead of her normal 40 hour workweek, she worked 60 hours in Orlando. However, she didn’t complain because most of her days were spent riding rides and playing games with the kids.

Upon returning from the trip, the nanny was exhausted. When she received her paycheck, she was surprised to find it was $300 less than her normal pay. When she read over her paystub, she noticed a $300 deduction for airfare. The nanny did not think this was correct, but before bringing it to Mr. Kellogg’s attention, she contacted her placement agency who referred her to Breedlove & Associates.

The Law

When accompanying an employer on a trip – whether a vacation or a business trip – an employee must be compensated for all hours worked during the trip, including the time spent traveling to the destination. If the employee’s working time exceeds 40 hours in a 7-day period, the employer must pay the employee for the overtime hours at the time-and-a-half rate. In addition to the regular and overtime pay, the employer is responsible for the employee’s traveling expenses, including airfare and hotel accommodations. These expenses are covered by the employer because the employee would not have incurred these expenses on her own.

A traveling employee does not need to be compensated during her “free time,” which is defined as time when she is not responsible for her charges and she has complete freedom to go and do whatever she pleases.

The Mess

A Breedlove & Associates consultant explained to the nanny that Mr. Kellogg had not handled her compensation for the trip correctly, but that this was a common mistake for new household employers. The consultant informed the nanny that she should have been paid for all hours worked and that Mr. Kellogg should not have deducted the expense of the flight from her paycheck.

The nanny presented this information to the Kelloggs and they were surprised and embarrassed to find out they had underpaid her. They apologized and explained to the nanny that it was never their intention to swindle her out of any additional money owed to her. Mr. Kellogg prided himself on paying the nanny “on the books,” but admitted he was not an expert in employment law.

The Outcome

Mr. Kellogg contacted Breedlove & Associates on the advice of the nanny to figure out how much he needed to pay her. We helped him calculate the additional compensation owed to the nanny for the trip and explained more about household labor law so he would be prepared for the next family vacation. The Kelloggs made a catch-up payment to the nanny right away and ultimately decided to sign up for our service so they would never risk making a similar mistake again.

How the Whole Thing Could Have Been Avoided

If the Kelloggs had called Breedlove & Associates from the beginning – as their agency recommended – we could have helped save them the embarrassment of underpaying their nanny. Luckily the employment relationship between the Kelloggs and their nanny did not suffer from this incident, but their situation illustrates how easy it is to make a mistake with payroll or labor law.

That’s why Breedlove & Associates prides itself on staying on top of any changes in the law that might affect household employers. And why we are willing to provide each and every family with a free phone consultation. It’s easier and less expensive to handle everything correctly from the beginning and we’re always here to help!

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!



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