Childcare Providers as W2 or 1099
It’s important to know whether your childcare provider falls into the category of a W-2 household employee or just an occasional 1099 independent contractor. Either way, families are far better off now to pay them legally and not under the table.
Use a CPA… but here’s the basics
Check with your local CPA on the exact rules.
However, keep in mind that usually if you paid more than $1000 per quarter or $2400 per year to one childcare provider, then that childcare provider is most likely a W2 employee of your family.
If you paid many different childcare providers, then they may be 1099 independent contractors.
Either way, be sure to play by the IRS rules. Claim your childcare tax credits and or use your dependent care FSA account to offset the costs.
Read on to find out more.
Tax Time
You know your taxes can be complicated. When you hire a childcare provider or other household employee, things get even messier thanks to labor laws and the “Nanny Tax.”
Because some household employees may not understand IRS tax rules and state laws around employing caregivers and housekeepers, they may turn to you for guidance. Fortunately, you can navigate the legalities of hiring a household nanny—and receive assistance along the way.
Why Are Nanny Taxes Important?
Former employees can file for state unemployment benefits, which alerts the IRS that you may have skipped paying household employment taxes. Further, if a nanny ever finds cause to file a wage dispute against you, a lack of tax payments could easily be exposed and you won’t have complete payroll records that are legally required.
Other reasons why filing taxes is essential:
Ensures client’s ability to obtain worker’s compensation insurance
Protects against future liabilities
Qualify for a tax credit (possible money in your pocket!)
Protect future career opportunities
Ensures financial security
How Household Employee Payroll Solutions Can Help
Take the burden of household payroll and taxes off your shoulders. When you outsource your client’s nanny tax, you get access to all tax records and filings in a central portal. This eliminates time spent asking employees to send tax information at year end. You can go get the information you need, when you need it. Payroll solutions offer flexible service plans that can be customized, whether you are interested in full payroll services with direct deposit or simply quarterly and annual tax filings.
Nanny taxes: A complete guide
(Source: Care.com)
An overview of how to pay nanny taxes and what the benefits are for doing it correctly
Most families are not tax experts. So when it’s time to hire a caregiver – especially if it’s your first time – knowing all the ins and outs of what the IRS and your state requires can feel confusing and overwhelming. To make this process easier, we’ll break down everything you need to know about household employment taxes, or nanny taxes as they’re commonly called.
What nanny taxes are
How to pay nanny taxes
What the benefits of paying nanny taxes are
What can happen if you don’t pay nanny taxes
How much time it takes to manage nanny taxes
What are nanny taxes?
The nanny tax is a combination of federal and state tax requirements detailed in IRS Publication 926 that families must manage when they hire a household employee, such as a nanny, senior caregiver or personal assistant. The taxes include:
– Taxes withheld from the employee: Social Security & Medicare taxes (FICA), as well as federal & state income taxes.
– Taxes paid by the employer: Social Security & Medicare taxes, as well as federal & state unemployment insurance.
For the 2022 tax year, nanny taxes come into play when a family pays any household employee $2,400 or more in a calendar year (or $1,000 or more in a calendar quarter for unemployment insurance taxes).
Note: Your obligations will vary depending on where you live. Not all states have income taxes, while others require additional taxes to be withheld from your employee, paid by the employer or both. To see the specific requirements where you live, visit the nanny tax page for your state.
What makes someone a household employee?
According to the IRS, a household worker is an employee if you control not only what work is done, but also how it is done. Generally speaking, that means the employee is coming to your home on the schedule you dictate while following your rules. It doesn’t matter whether the work is full-time or part-time or if you hired the worker through an online platform, they are still considered a household employee subject to taxes if you pay them more than $2,400 per calendar year. Families that misclassify their nanny as an independent contractor by providing a Form 1099 for filing taxes can be charged with tax evasion.
How to pay nanny taxes
Now let’s get into the process of actually managing nanny taxes. There are four main action items that families need to take care of:
Apply for Tax ID numbers: You need both federal and state tax identification numbers in order to report your nanny taxes. You can get your federal employer identification number (FEIN) from the IRS and use this number to obtain your state identification number from the appropriate tax agency in your state.
Calculate and track payroll: You need to accurately calculate your nanny’s gross pay, the taxes withheld from them and your corresponding employer taxes each pay period. (Use a nanny payroll calculator to help).
File tax returns year-round:
Typically on a quarterly basis, you will need to file state tax returns. Some states do require monthly or annual filings, so check the details in your area to be sure.
You should send 1040 estimated payments to the IRS four times per year.
Complete year-end tax forms:
You must provide your nanny with a Form W-2 by the end of January each year so they can use it to file their tax return.
The Social Security Administration requires you to file Form W-3 and Form W-2 Copy A. This lets them know that you’ve properly withheld FICA taxes from your caregiver and remitted FICA taxes of your own throughout the year.
You need to prepare a Schedule H and file it with your federal income tax return.
Your state may also require an Annual Reconciliation form, which summarizes the state income taxes you withheld from your nanny.
If you’ve joined Care.com HomePay, we handle all of these procedures and returns for you. Check out how our nanny tax service works.
What household employees need to provide
Before a caregiver begins working for a family, there are three things they need to provide:
A Social Security number or an ITIN.
A completed Form I-9 with proper identification.
A completed federal W-4 form and corresponding state income tax withholding form (if you live in a state with income taxes).
If your employee needs a federal and/or state income tax withholding form, we have up-to-date versions available to download.
What are the benefits of paying nanny taxes?
Both families and their nannies actually benefit from proper tax reporting. Employers may be eligible for tax breaks to offset the cost of their nanny taxes and have less to worry about if they’re audited by the IRS or the state. Caregivers also gain this peace of mind; plus, it’s easier to qualify for short and long-term benefits like:
– Social Security income and Medicare coverage upon retirement.
– Unemployment benefits if they lose their job due to no fault of their own.
– A verifiable employment history necessary for obtaining auto and home mortgage loans.
– Reduced health care costs via subsidies provided through the Affordable Care Act.
What can happen if you pay your nanny under the table?
Here’s a common example of what can happen:
– Your nanny works for you for several years without having taxes withheld or you paying taxes on their wages.
– When your kids are in school full-time, you decide to part ways with your nanny since their services are no longer needed.
– Your nanny files for unemployment benefits and is required to list you as their past employer. The unemployment office reviews the case and finds that you didn’t file any tax returns or pay into the state unemployment insurance fund.
– As a result, your ex-nanny will be refused benefits and you can now expect an audit from the state and the IRS.
– You will end up having to pay back taxes (Social Security, Medicare and unemployment insurance taxes) along with penalties and interest. In some cases, you could be charged with tax evasion and your professional license could be in jeopardy.
How much work will filing nanny taxes involve?
The IRS estimates the average family can expect to spend 50-55 hours per year correctly managing the nanny tax process. This includes all the tax requirements listed above, as well as managing your employee’s payroll and responding to any notices sent by the IRS and tax agencies in your state.
Read more about how to pay nanny taxes yourself.
Our HomePay experts can take care of all the work for you. From handling all the paperwork to actually filing your returns, we take care of everything. If this sounds like the better option for your family, contact our office at (888) 273-3356 or feel free to get started online.
Next Steps:
* The information contained in this article is general in nature, may not be applicable to your specific circumstances, and is not intended to be a substitute for or relied upon as personalized tax or legal advice.
Rules for flexible spending accounts are more generous this year, if your employer opted in. Here’s what to know… (Source: CNBC)
Key Points
Your company might allow you to roll over unused 2021 funds into 2022 for use next year, regardless of whether the money is in a health-care or dependent-care FSA.
There’s a good chance you won’t be able to take advantage of a higher 2021 contribution limit for dependent care FSAs.
If you’re unsure whether your company adopted any of the temporary rules enacted via legislation, there are several ways to find out, one expert said.
If you heard that the rules for flexible spending accounts are more generous this year, it’s true.
Just don’t count on being able to take advantage of them.
While congressional legislation expanded certain aspects of both health-care and dependent-care FSAs for 2020 and 2021, it’s up to employers whether to adopt the provisions. With many companies holding open enrollment for employee benefit plans around this time of year, it’s worth checking to see what your employer is (or isn’t) doing before deciding how much to contribute next year.
Both types of FSAs let you save pre-tax dollars to help cover either qualifying medical expenses or dependent care expenses like child care. In typical years, any unused money in your health or dependent care FSA account at the end of the plan year (often December) is forfeited.
However, some employers give you a 2.5-month grace period to spend the money. Or, for a health-care FSA only, you may be permitted to carry over $550 into the next year.
Regardless of which type of FSA you have, legislation signed into law late last year allows you to roll over any unused funds from 2021 to 2022 for use at any time next year, if your company opts in. This also applied to unused 2020 FSA money, which could be carried over into 2021.
Of the temporary reprieves enacted, this is the one you’re most likely to discover your company has adopted, said Lisa Myers, director of client services for the benefits accounts division at Willis Towers Watson.
However, that doesn’t mean most companies are onboard. For instance, less than half of the firm’s clients are employing the temporary change for unused 2021 funds (which would be used in 2022), Myers said. That’s down from two-thirds that allowed carrying over unused 2020 funds into 2021.
For companies that adopted the provision, exactly what’s changing depends on what was already offered. If your employer had an FSA grace period, it could be extended beyond the 2.5 months to the end of the plan year (i.e., December 2022). If the company had the $550 carryover allowance for health-care FSAs, that cap could be removed.
“The impact would be the same,” Myers said. “If adopted, the employer would allow [participants] to use unused funds from 2021 in 2022.”
Meanwhile, the limit on contributions to dependent-care FSAs was expanded for 2021 through a separate piece of legislation that was signed into law in March. For married couples filing joint tax returns, the cap is $10,500, up from $5,000. For single filers, the limit is $5,250, up from $2,500.
However, don’t be surprised if you don’t have access to the expansion.
“We had just a handful of clients who adopted that,” Myers said.
One of the reasons for this, she said, could be that it would make it harder for a company to pass non-discrimination testing for benefits — generally meaning any changes are not allowed to unfairly favor higher-paid executives or key employees. Or, maybe the employer determined that allowing the carryover of funds for dependent care FSAs would be a helpful solution to having more available this year to cover qualifying expenses.
The temporary rules also allow your employer to permit mid-year changes to contributions for either type of FSA, which typically is not permitted unless there’s a qualifying life change like marriage or the birth of a child. The IRS also allowed this in 2020.
Additionally, if you leave your company, you can now continue to access your FSA for the rest of the year if your company lets you. Typically, you’d lose access to your FSA unless you stayed on your employer’s health plan under COBRA, which allows workers to stay on their ex-employer’s insurance for up to 18 months.
If you’re unsure whether your company is adopting any of the provisions, there are several ways to find out.
“This is the time of year when many employers are sending open enrollment emails, and there will likely be links to information that will let employees know which of those temporary relief provisions they’ve adopted,” Myers said.
You can also check your company’s internal site for an enrollment guide or attend a virtual session focused on employee benefits if your company offers it, she said.
This article is not tax or legal advice. It is a reminder to use a qualified CPA and to always play by the IRS tax rules.
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