Nanny Taxes: To Pay Or Not To Pay?

That other tax, that is. Yes, believe it or not it is already that time of year again. The holidays are pretty much over and done with; now tis the season to start going through your stuff and getting ready for one of our least favorite times of the year.

Yep, you got it, none other than tax time. And just in time before you make a costly mistake on your 2014 taxes. Here is a reminder to make sure you take the extra step (if you haven’t already) to take care of your nanny taxes.

No this is not part of some Saturday Night Live Skit. If you pay a nanny or any other household employee for that matter, you, yes YOU are responsible for paying taxes on the wages you pay them.

Independent Contractor Trap

“That doesn’t apply to me, I pay my nanny as an independent contractor”. Yeah Okay, news flash. That ain’t going to cut it here. Nope, believe it or not there is a special paragraph in the Internal Revenue Code that specifically prohibits household employees from being compensated as independent contractors.

Remember, independent contractors normally receive some version of the 1099 Form at year end. Household employees (read that as your nanny and the like) must receive a W-2 Form. But get this, this is not just about filing the correct form. The point for you to take home is that you most likely owe our friends at the Internal Revenue Service (IRS) some dough if you haven’t paid up yet.

You see, it works like this. Take the tax year 2014. Based on numbers directly from the IRS, any such employee that you compensate $1,900 or more is subject to Social Security as well as Medicare Taxes. For the record, the combination of these two taxes is most commonly referred to as FICA.

Only Ever a W2 

As the employer, you and you alone are responsible for paying this tax directly to the IRS. Unless you pay a service that provides day care at home or a similar type arrangement, you pay an employee in the home, you owe the FICA taxes.

But nobody does that!

It is certainly true that compliance with the so-called nanny tax is not yet one hundred percent. But consider that this is one of those little issues in life that doesn’t matter until suddenly it does. Take a look at how this can play out.

Suppose you are cruising down the Interstate. Yeah, the speed limit is 55, but good grief it’s 1:00 in the morning, the road is virtually empty and before you know it you are doing 85. Well, until you see the flashing RED lights in your rear view mirror that is. Guess what? The same thing can show up with nanny taxes.

How would the IRS ever find out?

Dumb question really. Here’s one scenario. You let go of your nanny for whatever reason and she files for unemployment. Since you have not paid FICA taxes ever, there is no record of this person as an employee. A flashing red light goes off somewhere in IRS land. Before you know it you have a very official looking Letter Of Inquiry. Save yourself the headache, it is not really such a big deal.

How Much Are We Talking About?

It depends. No really it does. Depending on where you live and what you pay. Take a look at one easy example. Suppose you just so happen to live in the state of California. Things being what they are, you find you can’t even get halfway decent help for anything less than $13.00 an hour.

You find someone (finally) you can trust and you want to keep her so you pay more than average. You pay her $13.95 an hour. Once you total up the total hours don’t be surprised when you learn that you owe another $2,500 or so to the IRS for your nanny FICA taxes.

Is there a way out?

Not a way out so much as a way through. If you happen to work for a progressive thinking employer, you may well find that part of your health care package includes an option for a dependent care flexible spending account. The great thing about using a flex spending account is that you get to set aside pretax dollars. For 2014, you could have set aside up to $5,000.

Another option is available when you actually file your year end taxes. Look for the child and dependent care credit. This credit can be used to offset up to $3,000 to $6,000 for child care expenses.

The Bottom Line

You owe the nanny tax. Whether you have ever paid it is not the question. The last thing you want to go through is have the IRS discover you haven’t paid the nanny tax in years. Then you can look forward to back taxes, penalties, fees and an all around headache that you don’t need.

So what about you? What’s your spin on the nanny tax?


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