Q. I hired a nanny. Is she my employee or an independent contractor?

A. Nannies and most other household workers are employees of the family for which they work. The difference between employees and independent contractors hinges on the amount of control one has over the worker. The IRS created a 20-point test to determine control and has ruled that household workers should be treated as employees.

Misclassifying workers as independent contractors is an illegal practice which carries hefty fines and potential tax evasion charges.  It also creates additional expense for the employee because independent contractors are required to pay both the employee and employer portions of Social Security and Medicare.

If you think your worker might be an independent contractor, feel free to call our toll free help line at 888-273-3356. You can also petition the IRS for a formal ruling using Form SS-8; however, that ruling will take approximately 6 months.

Q. What employee taxes need to be withheld?

A. Your employee’s taxes usually range from 15-20% of gross wages. These include:

• Half of Social Security & Medicare (7.65%)
• Federal income taxes
• State income taxes (if applicable)
• Other state taxes (a few states have small taxes for things like disability insurance)

Q. Do I have taxes as a household employer?

A. Yes, household employers can expect to pay employment taxes that amount to approximately 9-10% of their employee’s gross wages. These include:

• Half of Social Security & Medicare (7.65%)
• Federal and State Unemployment Insurance
• Other state taxes (a few states have small taxes for things like workforce training)

 

Q. As an employer, can I take advantage of any tax breaks?

A. Yes. To lighten the financial burden for working parents, Congress has enacted tax benefits for families through employer-provided dependent care assistance (Dependent Care Account) and the Tax Credit for Child or Dependent Care. However, these tax breaks are only available if the employer fulfills the state and federal compliance process.

• Dependent Care Account (also called "Flexible Spending Account"). Most companies allow employees with child or dependent care expenses to contribute up to $5,000 of their pretax earnings to an individual Dependent Care Account. The money in this account is then used to cover childcare expenses, free of taxes. The savings are approximately $2,300 per year.
• Tax Credit. For those who don’t have access to a Dependent Care Account, they can claim the Tax Credit for Child or Dependent Care (Form 2441) on their income tax return at year-end. Basically, they can take a tax credit of 20% to 30% on qualifying childcare expenses. But expenses are limited to $3,000 for one dependent or $6,000 for two or more dependents. The savings from this tax break are $600 - $1,200 depending on number of dependents.

For many families, the tax savings actually exceed the employer’s share of the taxes, meaning families can save money by being legal!

 

Q. What is the compliance process for household employers?

A. The state and federal compliance process is quite detailed. Here’s an overview of what’s involved:

• Research employment tax and labor laws to understand legal obligations.
• Register for federal and state tax accounts.
• Complete and file New Hire Reporting.
• Identify and calculate taxes to withhold each pay period.
• Track gross pay, net pay and taxes withheld.
• Calculate the employer’s federal and state tax liabilities.
• Prepare and file state and federal tax returns and remit the employer and employee taxes each quarter.
• Prepare year-end tax documents (Form W-2, Form W-3, Schedule H and State Annual Reconciliation).
• Respond to IRS and state inquiries.
• Monitor ever-changing household employment tax law.

If you don't have the time (or the desire) to deal with these obligations on your own, please know that we are happy to handle everything for you for an affordable quarterly fee.

 

Q. I'm in a NannyShare arrangement with another family.  Do we both have to deal with the taxes or can we handle it all through one family?

A. In a NannyShare arrangement, each family is considered a separate employer.  Therefore, each family has tax responsibilities for their portion of the wages.  Additionally, each family has their own legal responsibilities and must follow the compliance process on their own.  The good news: when each family complies, they are both entitled to the tax breaks outlined above.  Since the employer taxes in a NannyShare arrangement are lower (the employer taxes are based on wages so they are essentially split between the families), most NannyShare families have tax breaks that far exceed their employer tax costs!

 

Q. What about overtime pay?

A. According to federal law, household employees are entitled to overtime pay. Overtime must be paid at 1.5 times the regular hourly rate for all hours worked over 40 in a 7-day work week. If a household employee is paid a salary based on a work week of more than 40 hours, the employment agreement should explicitly state the regular and overtime rates of pay.

For example, an employee and family agree upon a gross salary of $600 per week for a 45-hour work week. The standard wage for the first 40 hours is $12.63 per hour; the overtime wage for the remaining 5 hours per week is $18.94 per hour; and the total weekly salary is $600.

No limit is placed on the number of hours worked in a 7-day work week, as long as the employment contract is fulfilled and the employee is fairly compensated. Please note that live-in household employees do not have to be paid overtime but are entitled to regular pay for every hour worked. (Exception: live-in employees in New York state must be paid overtime for hours over 44 in a work week).

Q. What are the vacation, holiday and sick pay requirements?

A. Household employers are not required to provide paid vacation, holidays and sick days. (Exception: San Francisco families must provide paid sick leave based on hours worked). These benefits should be agreed upon as a part of the employment contract.

Q. What is Workers’ Compensation?

A. Every state has a worker’s compensation system. Under these systems, workers who become ill or injured on the job are entitled to medical and lost-wage benefits with a minimum of legal formality and expense. The systems are based on the idea that the employee gives up the right to sue for any injuries from work-related accidents in exchange for receiving benefits regardless of fault. Some states exclude household services from the workers’ compensation system. To learn if your state requires Worker's Compensation, click here. If you are required to carry it, or if you elect to carry it voluntarily, please check with your homeowner's insurance provider first. Often, umbrella homeowner's policies cover domestic workers so you may already be covered. If not, they can usually add a rider over the phone.

 

Q. Are there any tax breaks if I offer health insurance?

A. Yes. When a household employer contributes toward health insurance premiums, these dollars are not considered taxable income, meaning neither employer nor employee is required to pay taxes on that portion of the compensation. Families may choose to pay the healthcare premium directly to the health insurance company or give these dollars directly to their employee as a reimbursement.  If the health insurance contribution is a reimbursement to the employee, the family must keep a copy of a current health insurance card as proof of insurance.

Q. Can I run my nanny’s payroll through my business?

A. No, this is illegal. Here’s a simple explanation: All businesses are allowed to take tax deductions on employee payroll. The logic is that employees are direct contributors to the success of the business, and therefore the owner is allowed a tax break on payroll to offset some of this business expense.

The IRS has ruled that a nanny does not directly contribute to a business; therefore, it is illegal for a business to receive any kind of “tax break” on her payroll. Instead, your nanny is considered a contributing member of your household, so you are entitled to take a personal tax break on her payroll as a childcare expense.

 

Q. How do I report payroll and get paystubs?

A. Each payroll reporting deadline, we will send you a courtesy email reminder showing the standard gross and standard net pay.  If the standard pay is correct, no action is required on your part.  After the reporting deadline has passed, we will automatically process the standard amount.

If you have a change to that payperiod, you can modify the payroll in one of two ways: 1) call us and we can do it for you, or 2) click on the link in the email and modify your payroll online.  Once you modify and approve, you will be able to download a paystub (or you can arrange to have your employee automatically receive paystubs via email).  All of your paystubs will be stored online for easy viewing or retrieval.

 

Q. How does the tax remittance process work?

A. Prior to each tax filing deadline, we will prepare the appropriate state and federal employment tax returns and send you a preview copy.  We will also indicate the date upon which we need to remit the taxes to each tax agency.

At that point, you will need to make sure the money is in your account at least one business day prior to the funding date.  We will then take responsibility for remitting the tax dollars via EFT (electronic funds transfer) and synchronizing the payment with the tax filing to ensure that the payment and returns are attributed to the appropriate tax ID prior to the deadline.  The preview copy we sent you then becomes your file copy.

 

Q. What is your privacy policy at Breedlove & Associates?

A. At Breedlove & Associates, we vigilantly protect the privacy and security of our clients' personal and financial information. First, we utilize state-of-the-art encryption technology to safeguard all information relating to our clients and their employees. Second, client information is never sold, loaned, traded, disclosed, or shared with any third parties.  Third, we restrict information access to: a) our employees who require access in order to provide tax and payroll services, b) federal and state tax entities in adherence with tax reporting requirements. Fourth, we invest in rigorous document security and on-site document destruction. Finally, we utilize the most secure electronic payment and funds transfer companies and protocols available.

Our procedures exceed recommended Best Practices for information security and privacy and have resulted in zero breaches since we were formed in 1992. As technologies change, we promise to continually update our technologies and procedures in order to maintain the highest standards of privacy and security – ensuring that every one of our clients and their employees can continue to have complete peace of mind regarding their personal and financial information.

 

Q. Are your fees tax deductible?

A. Yes, our fees are considered professional tax preparation fees so they are fully deductible.

 

Q. How does your billing work?

A. We have a flat quarterly service fee that covers everything you need as a household employer (payroll, tax preparation & filing, and unlimited access to tax and labor law experts).  The service fee is billed at the end of each calendar quarter after the work is completed.  There is no long-term commitment so you may terminate at any time.

We have a one-time set-up fee of $100 and an extra fee of $65 at year-end to cover preparation of your year-end tax packet (Form W-2, Form W-3, Schedule H and State Annual Reconciliation).  The set-up fee is billed after your registration is complete.  The year-end service fee is billed along with your fourth quarter service fee.

 

Q. What forms do you prepare at year end and what do I do with them?

A. At the end of each calendar year, we prepare all required household employment tax forms on your behalf and send them to you by mid-January.  The contents are outlined below -- along with the actions required from you:

• Form W-2  You will need to give the prepared W-2s to all current employees (and mail to any former employees who earned wages during the year) by Jan 31.
• Form W-3  No action is required on your part.  We will file with the Social Security Administration on your behalf so your employee will get her retirement benefits.  The copy we send to you is your file copy.
• Schedule H  You will need to give the Schedule H to your tax professional (or whoever prepares your federal personal income tax return).  The Schedule H attaches to your 1040.  We will also include a summary of the federal tax payments we made on your behalf throughout the year; these payments should be accounted for on your tax return to avoid the possibility of a double payment.
• State Annual Reconciliation  No action is required on your part.  Some states require a recap of all household employer activity at year end.  If so, we will file the form on your behalf.  The copy we send to you is your file copy. 

 

 

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