The term “nanny tax” is really an umbrella for several different taxes: Social Security and Medicare taxes and the federal unemployment tax. State unemployment tax and perhaps state disability tax may be owed as well.
A nanny is an employee if the parents can control what work is done and how it is done. However, if the parent pays an agency directly, and the agency is the employer of the nanny, the agency pays the payroll taxes.
During the economic recession it is more important to file taxes then ever before. The reality is that in a tough economy when parents are losing jobs, so are nannies. Nannies that lose jobs need to file for unemployment insurance. When asked about their last place of employment, they will have to name the parents.
If a nanny gets hurt while working in the employer’s home and cannot work, she will need to continue to pay her bills, so she will need workers compensation. But if the nanny has not paid taxes, she cannot get workers compensation insurance, and will have to report the parents in order to obtain benefits.
If the nanny is older and about to retire she deserves to claim social security benefits. But, social security can only be claimed by those who have paid taxes. To obtain social security the nanny would need to report the parents to the Social Security Administration.
If the parents and nanny think they are clever by describing a nanny as an independent contractor responsible for their own taxes, the joke’s on the nanny. The nanny’s tax bill will be much greater as an independent contractor than as an employee since the parents won’t be responsible for paying a portion of Social Security and Medicare taxes for the nanny.
Kathy Webb of HomeWork Solutions and 4nannytaxes.com explains what to do if your employer's did not submit taxes in an article entitled, "What do I do - I didn't get a W-2?" at http://www.4nannytaxes.com/NEWS/Form_W-2_Not_Received.cfm
Just a portion of the article explains that if your employer does not intend to give you a W-2 or intends to provide a 1099 (independent contractor) remind the parents that as a nanny you are entitled to a Form W-2. The employer is responsible to remit the Social Security and Medicare taxes, as well as pay unemployment insurance.
The article at 4nannytaxes.com explains, “If this doesn’t work, get phone support from the Internal Revenue Service (IRS). The IRS encourages employees in this situation to phone 1-800-829-1040 for guidance.”
4nannytaxes.com recommends, “Even if your employer refuses to provide the W-2 Form [you] the nanny are still responsible for reporting your nanny wages and filing an income tax return. This is accomplished by completing Form 4852 Substitute Form W-2.”
The article says, "Nannies who use the Form 4852 will need to provide the family's name (both John and Mary Smith), their address and phone number (phone is not requested but very helpful). If the nanny has received a Form W-2 from this family in the past, the nanny should report the EIN from the prior form. If not, enter Unavailable or Unknown.”
4nannytaxes.com explains, “The IRS requests that you wait until April 15 to file your return, in the hopes that the family will come around and provide you the correct documentation. The nanny cannot eFile when using a substitute Form W-2. The conventional paper tax return is mailed to the appropriate address. When the nanny is forced to use the substitute Form W-2 it is MUCH harder on the employer to get the mess straightened out. The nanny is pretty much done at that point. It is in the employer's best interest to resolve the problem before it gets that far.”
"When a Form 4852 or Form 8919 are filed by the former nanny, the employer will be questioned by the IRS and the IRS will assume responsibility for collection of employment taxes. Nanny always remains responsible for her income taxes, federal and state if applicable.
The better option for parents is to file taxes properly. There are also two ways parents can reduce their nanny taxes. They are a Flexible Spending Account or the Dependent Care Tax Credit to reduce their nanny tax costs. These credits are only available if the parents and nanny pay taxes."
Not reporting payments could cost employers big bucks in terms of penalties and interest. Not paying taxes does not protect nannies from being laid-off, hurt on the job, or when ready to retire. Not paying taxes is against the law.
Kathy Webb, 4nannytaxes.com, Home/Work Solutions, Inc., 2 Pidgeon Hill Dr. #550, Sterling, VA 20165