Tuesday, April 14, 2009

Nanny Share Family

Innocent Mistake Disqualifies Tax Breaks
By Breedlove & Associates

Nanny Share arrangements become increasingly popular during tough economic times because they allow families to split the cost of the caregiver's wages as well as most of the associated costs. In addition, both families are entitled to the same childcare tax breaks as single-family employers. Since the employer tax expense is much less for a Nanny Share family, paying legally can create a significant financial benefit.

This combination of wage and tax savings can make it significantly cheaper to share a nanny than to employ one alone. However, in order to realize these savings, both families must establish themselves as separate employers and meet all state, federal - and sometimes local - employment regulations.

This case dramatizes the negative financial consequences of mismanaging the tax and payroll process in a Nanny Share arrangement.

The Mistake

Family A and Family B each have two young children and agree to employ a nanny to care for all four children at the same time. While the families agreed to split all costs right down the middle (including wages, taxes, CPA fees, etc.), the payroll and tax filings were managed entirely through Family A - with Family B reimbursing Family A at the end of each pay period.

At the end of the tax year, Family B tallied up their reimbursement checks and submitted them to the husband's HR department in order to take advantage of their dependent care account.

The Law

In a Nanny Share arrangement, the law views both families as separate employers.

In order to be legal, each family must:
  1. Set up state and federal household employment tax IDs
  2. File a New Hire Report
  3. Withhold the proper taxes from the nanny's pay
  4. Prepare and file state & federal employment tax returns and remitting their portion of the employee and employer taxes (based on their portion of the wages)
  5. Provide a Form W-2 to their employee at the end of each calendar year
  6. File Forms W-3 and W-2A with the Social Security Administration each year
  7. Prepare and attach a Schedule H to their Form 1040 federal personal income tax return

In other words, both families are required to meet the exact same obligations as all other household employers. While it seems more convenient to let one family handle everything, this practice is illegal. It also disqualifies the "other Family" (in this case, Family B), from taking advantage of the childcare tax breaks.

The Mess

  • In January of 2006, Family A and Family B agreed to a total salary of $32,000 for their nanny. Family A agreed to pay the full $32,000 in wages and get a reimbursement check from Family B each bi-weekly pay period for their half of the salary.
  • Family A presented their payroll and tax filing receipts to the husband's HR department and their CPA. They were very pleased to get a tax break totaling $2,500.
  • Family B also pursued their tax break, but they were denied the $2,500 savings since they had not met all the requirements of the state and federal tax process. Family B's HR department was forced to reject Family B's receipts. The IRS viewed Family B as having no proof that they paid legally - no tax accounts, no tax payments, no tax returns on file, etc.
  • Since neither Family A nor Family B knew the law before they set up their payroll process, Family B argued that it was not fair for them to be penalized while Family A benefited. They asked Family A to split the savings for 2006 and beyond.
  • Family A and Family B ultimately called Breedlove & Associates to solicit a professional opinion on the best way to proceed.

The Outcome

Both families joined Breedlove & Associates in January of 2007. They decided to swallow the loss from 2006, but since then Family A and Family B have been fully compliant and able to receive their full tax breaks.

How the Whole Thing Could Have Been Avoided

If the families had called a household employment payroll and tax expert like Breedlove & Associates at the outset, they would have learned that each family is considered a separate employer and could have easily - and affordably - complied with all federal and state laws. In addition to being risk-free, this would have allowed both of them to take full advantage of the tax breaks available for childcare expenses. A little knowledge on the front end would have saved them a significant amount of money, time and stress.

In these tough economic times, if you start seeing more Nanny Share arrangements, please remember that this innocent mistake is extremely common. You'll be a hero if you can steer your clients to these significant savings while dodging all the legal landmines. We're more than happy to be an extension of your team and provide each family with a quick, individualized consultation. In less than 10 minutes, we can explain the law, run budget scenarios and make sure their savings are optimized.

If you'd like to include information about the legal and tax consequences of Nanny Share arrangements, just let us know.

For more information about household employment tax and labor law,please visit us at www.breedlove-online.com or call us at 888-BREEDLOVE (273-3356).We're here to help our agency partners provide their candidates and clients with information, tools and resources that improve the employment relationship, eliminate legal risks for all parties, and generally increase the professionalism of the industry.

1 comment:

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