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Paying on a Net Basis is not as Convenient as You Think

by Breedlove April 23, 2014

The Whitaker family was a few months removed from the birth of their first child when Mrs. Whitaker decided she wanted to return to work. The family weighed their childcare options and determined a nanny would be the best fit for their new daughter. Even though they were first-time household employers, Mr. Whitaker felt comfortable handling the hiring and employment process without the aid of an agency or a tax professional.

The Mistake

After interviewing several candidates, the Whitakers found a nanny they really liked who had experience working with young children and lived within 10 minutes of their Massachusetts home. When it came time to discuss her pay and how taxes would work, the nanny mentioned she had never had taxes withheld before and was used to taking home a certain amount of money each week. Not wanting to let a minor detail result in losing their favorite candidate, the family hired the nanny after agreeing to pay her $500 per week on a Net Pay basis. The Whitakers didn't really understand what that meant financially or administratively, but figured since they were hiring the nanny in October, they could figure everything out when it was time to file their personal taxes.

The Law

Payroll is calculated, tracked and reported to the IRS and state tax agencies on a Gross Pay basis (before taxes). In the eyes of the law, there is no such thing as a Net Pay compensation agreement.

Instead, families should negotiate a household employee's pay in terms of gross wages and then withhold the following taxes:

-
Social Security tax - 6.2% of gross wages
- Medicare tax - 1.45% of gross wages
- Federal income taxes - determined by the employee's allowances on Form W-4
- State income taxes - determined by the employee's selections on their state withholding form
* Only applicable if the family lives in a state with income taxes


Employees fill out Form W-4 and their state withholding form to elect the withholding status that most accurately reflects their life situation. This allows them to pre-pay income taxes each pay period at a rate that will approximately cover their end-of-year income tax liability. It is the employee's obligation to make the appropriate elections on Form W-4 and weigh the other factors that might influence their tax liability (i.e. other income, investment dividends, deductions, tax credits, etc.).

If an employee's elections cause taxes to be under-withheld, they have to make a tax payment at year-end. On the other hand, if their taxes were over-withheld, they will get a tax refund at year-end. Either way, it has no impact whatsoever on the employer because their obligation is simply to withhold the appropriate amount of taxes from their employee's gross pay.

The Mess

The income tax withholding process is based on tax tables set by the IRS and the state - and they change every year. This makes working backwards from Net Pay to Gross Pay (also called "grossing up") a potential administrative nightmare for families and extremely prone to error.

 

When it came time for the Whitakers to file their nanny taxes for the first time - and file their personal income taxes - they discovered their willingness to gross up for their nanny's taxes actually caused them to pay more than they should.

 

The nanny elected to choose Single with 0 Allowances on her federal W-4. This election meant her gross wages were reported by the Whitakers as $668 per week in order to give her the $500 take-home pay she requested. Additionally, the family's employer taxes totaled $61 per week, making the total cost (before tax breaks) $729 per week for the 12 weeks of the calendar year the nanny worked for them.

 

However, since the Whitaker's nanny was single and had no children, the federal W-4 worksheet recommends she claim Single with 2 Allowances to better fit her life situation. If the nanny had filled the W-4 out this way, the Whitakers would only have reported $637 per week in gross wages to get the nanny to take home $500. The employer taxes in this case would be another $58 per week - taking the family's total cost (before tax breaks) down to $695 each week.

 

This $34 weekly difference amounted to $408 over the course of three months and would be $1,768 in additional taxes if applied to a full year.

 

The Whitakers were happy to pay this additional amount thinking they were helping the nanny cover her tax obligation. However, when the nanny filed her tax return, she got a large refund because, at Single with 0 allowances, the IRS determined she had too much in income taxes "withheld" from her pay. The family was confused and felt that since they covered her income taxes, they should be entitled to some or all of the nanny's tax refund.

 

A neighbor of the Whitakers suggested they call Breedlove & Associates for advice because we handled their household employment taxes. When the family called, we explained the inherent issues with grossing up a net pay. Not wanting to run into this situation again, the family signed up for our service. Unfortunately, when we reviewed their tax returns, we found numerous errors in their "gross up" calculations due to changing tax tables during the year. This led to miscalculations which required us to amend each return they filed.

The Outcome
Once they understood the situation, the Whitakers felt that the nanny had taken advantage of their generosity. They had agreed to cover her taxes, but they did not agree to overpay her taxes so she could get a large bonus at the end of the year. The family strongly hinted to the nanny that the tax refund money belonged to them, but the nanny did not take the hint and never offered to reimburse them. This caused friction and distrust between the two parties and led to the nanny's termination within the next three months.

How the Whole Thing Could Have Been Avoided
A little knowledge by all parties at the beginning of the relationship would have prevented all the mistakes and distrust. Knowing what they know now, the Whitakers understand to always offer a gross wage to any future nanny. Breedlove & Associates has an Employee Paycheck Calculator that can be easily utilized to convert a Net Pay to a Gross Wage. Little details like this can help you steer clear of financial and legal issues that could potentially make or break an employment relationship. And if you run across something out of the ordinary, just give us a call. Timely professional advice can save thousands of dollars and dozens of hours of tedious work for busy families.

Celebrate National Nanny Training Day Early with Breedlove

by Breedlove April 8, 2014

National Nanny Training Day 2014 is this Saturday, April 12th. It’s a great opportunity for caregivers who want to get the most out of their job by learning new skills to improve their quality of care. Thousands of professionals will participate in 37 events across 19 states (and Washington, D.C.) hosted by local nanny agencies.

This year, our very own Stephanie Breedlove will be participating in a pre-National Nanny Training Day Google Hangout on Thursday, April 10th from 9am to 10am CST to answer any questions you may have. Stephanie will be part of a panel of experts that includes Kathy Dupuy with Mom’s Best Friend, Lora Brawley with Nanny Biz Reviews, Katie Bugbee with Care.com and Kellie Geres with Regarding Nannies.

The Hangout will be broadcast live, so don’t miss your chance to have your questions answered by five of the most respected women in the industry. To RSVP and access the event, visit https://plus.google.com/events/c65mpalchsk873s12ffe3flue4k.

We look forward to seeing you all there!

New Requirement for Sick Leave Begins for New York City Families

by Breedlove April 1, 2014

Effective today, April 1, 2014, household employers in New York City will be required to provide their employee with 2 paid days of sick leave per calendar year after one full year of service. This is in addition to the 3 paid days off required by the New York Domestic Workers’ Bill of Rights. Many families already provide this benefit as a part of their employment arrangement, but for those that don’t, please keep this mandate in mind if you’ve had a nanny, senior caregiver or other household employee working for you.

New York City isn’t the only city where household employers are required to provide sick leave. Families living in San Francisco, Jersey City, Portland and Washington, D.C. have to comply with versions of this law as well – and families in Newark, New Jersey will join this list effective May 29. If you need to know the specifics of any payroll, tax or labor law in your area, please visit our state-specific pages.

Banking Hours - Why It Does Not Pay Off

by Breedlove March 18, 2014

The Lawson family wanted to take an impromptu vacation after Mr. Lawson received a promotion. The family scrambled plans together and organized a five day reprieve from work and responsibility. The best part of the trip for Mr. and Mrs. Lawson would be the opportunity to take their first vacation with their two-year-old son who was usually supervised during the day by the family's nanny.  

The Mistake 

The Lawson's nanny was their first household employee. They were paying her on the books for the (generally) 40 hours per week she worked (8 hours per day, Monday through Friday) and even gave her five paid vacation days per year. The family chose to not take their nanny on vacation with them and let her know she could simply take the week off. However, they did not discuss how this time off would be interpreted with respect to her vacation time.

Several months after the Lawsons came back from their vacation, their nanny requested to take all five of her paid vacation days to spend time with her parents and extended family who lived several states away. The family informed her that they already paid for her vacation days when they took their trip. However, to avoid conflict, the Lawsons let the nanny take her vacation with the agreement that they would bank those 40 hours by having her work an extra two hours "off the clock" every day for next four weeks after she returned.

The Law 

Federal wage and hour law does not allow employers to average the hours their employees work across multiple weeks - meaning they should be paid for every hour they work during the workweek the hours are accumulated. The Fair Labor Standards Act (FLSA) defines a workweek as seven consecutive 24-hour periods. Any hours worked in excess of 40 during a workweek are required to be paid at an overtime rate of at least 1.5 times the employee's regular rate of pay. These laws are in place so employers cannot carry over hours from week to week to avoid paying an employee overtime.

The Mess 

After two weeks making up for hours already paid to her, the nanny became frustrated with having to stay late at the Lawson's home. She confided in her roommate who was attending law school and explained a few things to her about labor law and the FLSA. The nanny confronted the family about the "off the clock" hours and the lack of overtime. She asked that the Lawsons allow her to resume her normal working hours and be paid time-and-a-half for the 20 hours of overtime she had already accumulated. The family, unfamiliar with the law, had to make an emergency call to their accountant to verify what their nanny claimed was true.

The Outcome 

The Lawson's accountant utilized Breedlove & Associates to handle the family's payroll and taxes and made a quick call to our office. A consultant informed her that the family indeed had to pay their nanny for the 20 hours of overtime she worked. Because the nanny was earning $18/hour, the 20 hours of overtime resulted in an additional $540 in gross wages having to be added to the nanny's next paycheck. The financial dispute between the family and the nanny ultimately created an awkward employer/employee relationship for both parties and the Lawson's nanny quit after the end of the calendar year. 

How the Whole Thing Could Have Been Avoided 

If the Lawsons and the nanny had discussed how the family's vacation would be viewed before they left, each side could have avoided the initial conflict. Additionally, the family could have reached out to Breedlove & Associates - or asked their accountant to do so on their behalf - before deciding to carry over the nanny's hours. When there are variances from the normal workweek, it's important for employers to verify all labor laws are followed before proposing or agreeing to any changes.

Ignoring Workers' Compensation Can Have Messy Consequences

by Breedlove January 22, 2014

Families hiring a household employee for the first time often feel like they're taking a crash course on taxes and payroll when they learn about how to properly pay their caregiver. But there's another part of being an employer many families forget - addressing workers' compensation. In this edition of The Legal Review, the Johnson family learns a valuable lesson about how important this insurance policy can be.

 

The Situation 

The Johnsons live in Ohio with their two children - one of whom has special needs. While Mrs. Johnson had left her career two years ago to be a stay-at-home mom, she was offered a job opportunity last summer she simply couldn't refuse. After several discussions on how to handle childcare for their kids moving forward, the Johnsons decided hiring a nanny would be the most beneficial for their special needs child. After a month-long search, the family found a wonderful nanny named Rebecca with several years of experience working with special needs children. 

The Mistake 

Rebecca was used to being paid on the books, but the Johnsons were unfamiliar with their responsibilities and enlisted the help of a local tax office for guidance. The CPA the Johnsons spoke to was familiar with household employment tax law. He was able to instruct the family on how to file for their federal and state tax IDs and keep up with Rebecca's payroll and the taxes withheld from her pay. But unfortunately the topic of workers' compensation was glossed over as the CPA told the Johnsons their homeowner's insurance policy probably had them covered.

 

The Law 

Many states, including Ohio, require household employers to carry a stand-alone workers' compensation insurance policy - and in Ohio, the policy must be purchased through the state. Workers' compensation provides a family's employee with coverage for medical bills and lost wages if she is injured on the job. The policy prevents families from having to cover these costs out of pocket and protects them from lawsuits because employees that accept workers' compensation benefits forfeit the right to sue their employer. Additionally, in states that require a policy, families caught without a workers' compensation insurance policy can face significant fines.

 

The Mess 

One day while cooking for the Johnson's children, Rebecca badly cut her finger causing her to lose a substantial amount of blood. The injury was so severe, she had to go to the emergency room where the doctor recommended that she keep her arm in a sling for a month to prevent any long-term damage. As a result of her trip to the ER, Rebecca accumulated thousands of dollars in medical bills. She had no idea how she was going to cover the expenses and how she was going to be able to effectively care for the Johnson's children one-handed for a month, so she went to the family for advice.

Because the CPA the Johnsons spoke to led them to believe they had workers' compensation coverage through their homeowner's insurance policy, the family contacted their agent to figure out how to handle Rebecca's claim. But to the Johnson's surprise, their agent informed them the liability coverage in their policy did not cover an employee working in their home. As such, Rebecca would be ineligible for workers' compensation benefits since there was no policy in effect at the time of the incident.

 

The Outcome 

The Johnsons thought Rebecca was doing a wonderful job with their children, so they had no choice but to cover her medical bills and wages for a month out-of-pocket if they realistically wanted her to keep working for them. Additionally, they didn't feel they could afford quality backup care while Rebecca recovered, so they arranged for Mrs. Johnson to work part-time from home and use the majority of her vacation time for the year to stay home with the children. The family has since purchased a workers' compensation policy and Rebecca continues to work for them.

 

How the Mistake Could Have Been Avoided 

Had the Johnsons called their insurance agent to double-check if workers' compensation was part of their homeowner's policy, they would have quickly discovered there was not a policy in place. The family could have purchased a policy through the state and Rebecca would have been eligible for workers' compensation benefits when she was injured. Additionally, the family would not have incurred the cost of her medical bills or lost wages and would have been able to hire a temporary nanny while she recovered.

 

Because workers' compensation is not administered through the tax and payroll process, it's an easy item to forget you're preparing to have someone work in and around your home. If you have questions about workers' compensation or if it's required in your sitution, please give Breedlove & Associates a call. A short phone conversation with one of our experts can ensure you won't make a potentially expensive mistake.

Tax Rules for a Holiday Bonus

by Breedlove December 20, 2013

Just like many other professions, the holiday season is a common time of the year for families to reward their household employee with a bonus. And since your employee is probably buying gifts for family and friends, the timing works out very well for her. During this time of the year, we often get questions on how to handle a holiday bonus from a payroll and tax standpoint, so here’s what you need to know.

A bonus may seem like it should be handled differently than the nanny’s standard pay, but the IRS considers a bonus to be just another form of taxable compensation. Therefore, you should add the bonus to your nanny’s normal gross wages and withhold taxes accordingly.

It’s a good idea to give your employee a heads up that her income will be taxed at a higher rate than usual for the pay period that includes the bonus. This is because the IRS’ tax tables assume her new gross wage amount is a raise rather than a one-time bonus. Because the tax tables are part of payroll law, there is no way to deviate from them to reduce your employee’s taxes.

However, the good news is the higher tax withholding is temporary and is treated as a pre-payment toward your employee’s tax liability for the year. So, when she files her tax return, it will be recouped in the form of a larger refund or a lower tax payment, depending on her situation.

If you would like to calculate the taxes that will be withheld from your employee’s bonus, please feel free to use our Employee Paycheck Calculator.

Minimum Wage Increasing in Several Cities and States in 2014

by Breedlove November 22, 2013

Many people think of minimum wage as the $7.25 per hour mandate set by the federal government. But in actuality, each state (and some municipalities) have the option of accepting the federal minimum wage or setting their own minimum wage. In areas where two minimum wage rates exist, the rule of thumb is you must pay your employee the higher of the two rates.

 

Every year, several states elect to change their minimum wage to account for things like inflation and cost of living. Starting January 1, 2014, if you are a household employer in the following states or cities, please make sure you are paying your employee at least the new minimum wage so you stay in compliance with state and city laws.

 

States:

Arizona: $7.90 per hour

Connecticut: $8.70 per hour

Florida: $7.93 per hour

Missouri: $7.50 per hour

Montana: $7.90 per hour

New Jersey: $8.25 per hour

Ohio: $7.95 per hour

Oregon: $9.10 per hour

Vermont: $8.73 per hour

Washington: $9.32 per hour

 

Cities:

San Francisco: $10.74 per hour

Albuquerque: $8.60 per hour

San Jose: $10.15 per hour

 

If you have any questions about minimum wage, overtime or other aspects of labor law, please visit the Answers page at www.breedlove.com or give us a call. We’re here to help!

In the World of Nanny Taxes, a 1099 is Never the Right Answer

by Breedlove November 20, 2013

The hiring process is the time to address nanny taxes. But many families are so focused on finding the perfect caregiver that they overlook the employer tax requirements and unnecessarily expose themselves to financial and legal risk.

 

This edition of The Legal Review highlights this scenario as the Johnson family runs into tax trouble when their occasional babysitter, Brooke, begins to work for them as a full-time nanny. She couldn’t be more excited to have her first full-time job, but it didn’t occur to her or the Johnsons that there would now be legal responsibilities involved with her employment. 

 

The Mistake:

Brooke began her work as a full-time nanny with the Johnsons in the summer of 2012. Since she recently graduated from college, Brooke was thrilled to have a steady income and had no issue continuing the type of employment agreement she already had with the Johnsons. The family paid Brooke in cash at the same hourly rate they agreed on when Brooke began babysitting and their arrangement appeared to be progressing smoothly.

 

Until January. Brooke’s father, an accountant, began pestering her about filing taxes. He told her that she was an employee now and her income needed to be reported to the IRS. Brooke approached the Johnsons for guidance, and eager to help, they produced a 1099 for her listing her wages for the year.

 

The Law:

If a family pays a nanny, senior caregiver or other household employee $1,800 (2013) or more in a calendar year (in 2014, the threshold will increase to $1,900), they are required to withhold Social Security and Medicare (FICA) taxes from the employee’s wages and pay a matching portion of FICA taxes on top of their employee’s gross earnings. They are also required to pay federal and state unemployment insurance taxes if the employee earned more than $1,000 in a calendar quarter.

 

Note: Other employer taxes may apply depending on the employer’s residence state. Visit your state’s tax page for more details.

 

Additionally, nannies are classified as employees in the eyes of the IRS, not independent contractors. In order to legally report their wages and the taxes withheld, their employer must provide them with an accurate W-2 by January 31. Families who misclassify their nanny as an independent contractor by providing them a Form 1099 can be subject to tax evasion charges by the IRS. Recently, the U.S. Department of Labor released its budget details, including a new line item for $10 million in state grants to enhance enforcement of worker classification laws.

 

The Mess:

Brooke obtained the 1099 from the Johnson family and brought it to her father so he could assist her in filing her taxes. Her father immediately realized this was incorrect and instructed Brooke to have the Johnsons provide her a W-2.

 

Afraid she would end up in legal trouble with the IRS, Brooke came to the family in a panic explaining the difficulty she was having filing her taxes. The Johnsons were embarrassed and unaware of what to do since they paid Brooke in cash and obviously never withheld FICA taxes for the entire time she worked for them in 2012. They were also concerned for their personal tax liability because they never paid the matching employer portion of FICA taxes.

 

The Outcome:

Brooke asked her father if he could help her and Johnsons remedy their tax situation. But because household employment taxes were not something his accounting office handled, he advised the Johnsons to call Breedlove & Associates.

 

Mrs. Johnson called the next day and spoke to a Breedlove consultant who informed her that we could go back to the previous year and file the appropriate tax returns to ensure they were compliant with the law. When the consultant explained that a W-2 could be prepared for Brooke in only a few days, the Johnsons signed up immediately. The family informed Breedlove & Associates of all the wages they paid to Brooke and agreed to cover the taxes that should have been withheld.

 

Breedlove & Associates was then able to retroactively file all of the Johnson’s state tax returns for the 2012 tax year and process the year-end documents – including Brooke’s W-2 – which listed the correct amounts of Social Security and Medicare taxes. Brooke was finally able to file her taxes. To top things off, Breedlove & Associates was even able to get the state to waive the penalties they assessed on the Johnsons for filing their taxes late.

 

How the Whole Thing Could Have Been Avoided:

If the Johnsons had only been aware that hiring a nanny full-time entailed new responsibilities as an employer, the whole mess could have been avoided. Breedlove & Associates works to educate and keep families compliant with the law. By withholding taxes the whole year, making appropriate tax payments and filing correct returns, Breedlove & Associates ensures that every employer is acting within the law and is never stuck in a bind like the one the Johnsons found themselves in. The Johnsons are grateful that Breedlove & Associates now handles Brooke’s W-2 and everything else related to her pay and their taxes!

FICA Threshold Increasing for 2014

by Breedlove November 13, 2013

Recently, the Social Security Administration announced that the Social Security & Medicare (FICA) tax threshold for 2014 will increase from $1,800 to $1,900 in gross wages and cap at $117,000. For families with full-time household employees, this change should not affect their situation because these employees will earn well over the new threshold.

However, for families that use temporary employees on and off throughout the year, this increase gives an extra $100 leeway before the tax withholding and remittance requirements kick in. Please keep in mind that, even though you may not have to withhold FICA from your temporary employee, you may still be required to file unemployment tax returns if the total paid to all employees exceeds $1,000 in a calendar quarter (a few states have thresholds that are even lower).

Whether you have to worry about FICA or not, remember you are still legally an employer and must follow all local, state and federal labor laws. For the specific requirements in your area, please visit or state-specific pages or give us a call. We’re here to help!

Nanny Tax Tip: Take Advantage of Your FSA Open Enrollment Period

by Breedlove October 17, 2013

If you have a nanny or other childcare provider currently working in your home – or are planning to hire in 2014, now is the time to check with your company’s human resources department about enrolling in a Dependent Care Account (a.k.a. Flexible Spending Account or FSA) next year. If you or your spouse has access to this benefit, you’ll be able to pay for up to $5,000 of your childcare expenses with pre-tax dollars. Depending on your marginal tax rate, this will save you between $2,000 and $2,300 next year.

Most companies have open enrollment for their FSA program in the fall and, if you miss it, you’ll have to wait another 12 months unless you have a “life-changing event” such as the birth of another child.

If you miss the enrollment period, you can still take advantage of the Tax Credit for Child or Dependent Care. While the savings are much less than an FSA ($600 if you have one child or $1,200 if you have two or more children), it’s still worth taking advantage of.

For more information on dependent care tax breaks, visit our Answers section or give us a call.



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