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"Nanny Tax" - Payroll
for Domestic Employees If
you pay more than a threshold amount, you are required to prepare a
stripped-down sort of payroll for your household employees. In that case, you
issue a W2 to the employee, and you pay any federal payroll taxes with your
individual tax return. Separately, you would pay unemployment tax to the
state. This is the so-called nanny tax that has tripped up many an aspiring
political appointee who failed to pay it properly. You
would avoid this set of tax rules if the person is not an employee, but an
independent businessperson. For example, a contract cleaning service is not
your employee. Nor is a landscaping company. But a gardener on the grounds of
your estate? An employee. Many
domestic employees cheerfully work “under the table”. Trouble arises when something
goes wrong and, suddenly, the employee claims exploitation or violation of
her rights – or even, more simply, that she didn’t know she owed tax on the
income and blames you for the omission. Non-income tax aspects of domestic
employment can also be important. For example domestic employees are
generally entitled to protection of labor laws, and to unemployment insurance
coverage. As an employer, you can end up in hot water where following the
rules would not have cost you much. Here
are some FAQs on the subject. 1. What is
the threshold amount of compensation that triggers this tax regime? $1700
or more in 2011 to any one household employee or $1000 or more in any
calendar quarter of 2011 to household employees. 2. How much
tax do I have to pay for the amount I have estimated above
? (i.e., if I pay my worker $15 per hour, is my effective rate now
$17/hour after adding $2/hr for tax?) The
taxes and expenses to consider are ·
Social Security ·
Medicare ·
Federal Unemployment (FUTA) ·
State Unemployment (SUTA) ·
Workers Compensation - required in MA if the
employee works at least 16 hours per week Social
Security and Medicare together amount to 7.65% of the first $106,800 of wages
you pay each employee. The
worker is also supposed to pay 5.65% in 2011. In most jobs, the worker’s
share is withheld from his or her pay. In household employee situations,
frequently the boss pays the Social Security and Medicare tax on behalf of
the worker. In that case, you have to do some math to figure out just how
much to pay. That’s because your payment of the tax for the nanny is itself
compensation. Social
Security and Medicare are the expensive taxes. The others are not so bad.
FUTA is a max of $56 per year per worker. SUTA varies, but budget $300 per
year per worker. Workers Compensation is not mandatory in Massachusetts
unless the worker puts in at least 16 hours per week. If you provide workers
comp, it should cost a few hundred dollars per year. So,
if you will withhold the Social Security and Medicare taxes from the worker’s
pay, a budget might be $16.50 or $17.00 per hour once those taxes are added in, and $17.00 to $17.50 if you will pay the Social
Security and Medicare tax for the worker. The taxes really aren’t that
costly. The hassle of complying with all of this is more the point. You
also are required to verify the worker’s eligibility to work in the USA by
having her complete Form I-9. 3. How
should I pay the worker? (i.e., via check or cash) It
is legal to pay either way. But I would recommend checks to provide a clear
record of her payments. This way she cannot later get confused and say you
haven’t paid her, when you have. 4. How do we
prepare her tax documentation (i.e., do we issue her a 1099?) You
issue her a Form W2 by the last day of January 2012. You report household
employee Social Security and Medicare and FUTA taxes to the IRS as part of
your individual tax return. As with other federal income taxes, you are
generally required to prepay federal nanny taxes. You do this through
withholding at work or through estimated tax installments. If your
prepayments don’t cover all of the tax due, you pay
the balance with your return in April. You pay SUTA to the relative state
agency. You pay optional Workers Compensation to an insurance company.
Most insurance agents handle Workers Compensation; one idea is to start with
whatever agency sells you car or homeowners insurance. The rates are the same
for the same sorts of employees under Workers Compensation policies. There
are payroll services which specialize in managing nanny tax for household
employers. They charge a fee for doing so but generally do a good job making
sure the required taxes get withheld and deposited. Here are
links: Federal Household
Employer's Tax Guide Massachusetts Household Employment Tax Guide
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Last revised: 12/23/2010 |