Tax Season Dilemmas for Nannies By Tom Breedlove
There is a fairly common misperception that families can classify a domestic worker as an independent contractor if they want to. Thanks to misinformation floating around on the Internet -- and sometimes even bad advice from a general tax professional -- some families are misled into thinking they can "just give her a 1099." (Form 1099 is the form business use to report wages paid to an independent contractor).
The IRS has ruled definitively that nannies and most other domestic workers should be classified as employees. Misclassifying them as independent contractors is considered tax evasion and offenders are saddled with back taxes, penalties, and interest. If caught, it is an extremely expensive mistake for families. Being classified as an independent contractor is not only illegal, it's financially bad for the nanny. That's because independent contractors are required by law to pay for both halves of the FICA taxes (social security and medicare).
In 2011, the employee portion of FICA is 5.65% of gross wages (it's normally 7.65%, but there is a temporary deduction to help stimulate the economy). The employer portion of FICA is 7.65%. Having to pay the additional employer FICA tax burden can break the bank for many nannies. (For someone earning $30,000 per year, being misclassified as an independent contractor would cost her $2,295 per year in additional taxes).
If you're a nanny making more than $1,700 in the 2011 calendar year from a particular family, the family should provide you with a Form W-2. If they give you a Form 1099, you're being misclassified -- and it's costing you money. Don't let yourself get "1099-ed!" Make sure the family understands the risk they're taking -- and the additional tax burden being placed on you.
Tom Breedlove is a Partner at Breedlove & Associates, the nation's leading specialist in payroll, tax, and HR services for household employers.
15 comments:
I actually know quite a few nannies that proudly boast that they do this since they work more than one job per year. At nanny conferences newborn specialists and traveling nannies have mentioned they have more than one full time job per year so they file as independent contractors.
It's confusing and difficult to work for different families and expect them all to file your taxes in one year.
Tom, I wonder if that's ok in those situations.
I was reading on FB and prefer not to include my name... I heard the IRS does NOT audit nannies, period. If that's the case then the parents have no reason to fear being penalized.
@Anonymous, the IRS will audit a Nanny...I have a friend that let her family 1099 her and the IRS audited her and the parents and she ended up owing a lot of money because they had been 1099 her for years and they fired her when they got audited because they felt like she had turned them in to the IRS. IRS doesn't discriminate when they want their money they want it they don't care who you are and what you do...lol...Again great article.
Oh wow Shaun that is scary. My boss is an accountant he said they don't audit nannies to me too. But, we do pay taxes as we should!
I've heard of nannies doing this too. I never realized it hurts the nanny making her pay more. Good article.
I'm a nanny and I did get audited. The family required that I be 1099'd at the beginning of my employment, and I didnt question it. (Prior to working for them all the other families paid me cash and I was just fine with that but I needed the job and agreed)Unfortunately I am now facing almost $4,000 in taxes and penalties/interest PER YEAR of employment. I was fine with this at first, I dont mind paying my fair share of taxes. So I contacted an accountant to try to see what options I had for deductions/write offs, etc. and he said the IRS is firm that all nannies need to be W2'd...we shall see if I still have a job after my employer sees that they're going to have to pay unexpected money for the past 3 years of employment.
I am currently a nanny (first time). From all that I have read, they are required to claim you as a household employee. When I recently asked about this to my employer they said I would be given a 1099 and its in my best interest because I can then write off gas (they live close to me) and things like dry-cleaning (I have only had my uniform dry cleaned once!). I am not blind and realize they are more than likely trying to save themselves some money.(which costs me more!) However, I am huge when it comes to following rules especially the law. I felt cornered when told how it would be handled. Only other thing to do would be to quit and I cannot afford that. I just do not understand how a family can justify doing this to someone who so lovingly cares for their children. Especially when they can more than afford to pay the taxes.
Lesson learned
You guys are confused. It doesn't cost the nanny any more to be a 1099 rather than a W2. It's just additional taxes that the parent has to pay. The 1099 vs. W2 issue is one of control. The IRS website says that if you provide the nanny service in your own home then you are definitely a 1099. If you do it at the child's home it is a little more murky. Do you have some control over what time you get to work, over the activities and schedule for the child(ren)? If so, then you can be a 1099. If the parent controls your every move, then you should be a W2.
Anonymous you are talking about two different types of worker.
If the child care provider cares for a child in their own home you are not a nanny.
Nannies care for the child in the child's home.
You are defining a family child care provider who is a person who uses their residence to provide paid child care on a regular, ongoing basis. Children are brought to the caregiver's home for care (vs. a nanny who is a caregiver who goes to the child's home to provide care).
Home child care providers should be licensed by the state and the care providers should have ba,sic training in first aid, safety and child care.
Both nannies and home child care providers should be trained in CPR First Aid and safety but nannies aren't certified or licensed and they don't work in their own homes. Nannies work in the child's home.
Anonymous is wrong. A nanny cares for children in the children's house. If the caregiver cares for kids in her own home (the caregiver's home) they are not a nanny.IRS defines nannies as employees, not as self employed.
So does it change things if you work for more than one family at a time? I will sometimes work for 2 or more families who need 20 hours or so. Sometimes it's flexible times and days and sometimes it is consistent. How could I be considered an employee by both?
You are supposed to pay taxes and report income with each and every family that pays you $1,800 or more per year.
Does everyone who babysits and makes $2,000 per year follow the law and report it, no. Is it illegal to not report it? Yes. It's not about the number of families you work for but the amount you earn. If you earn $1,800babysitting for someone in an year it's supposed to be reported.
what about if you are a Newborn Care Specialist?
what about if you are a Newborn Care Specialist?
I have checked with the IRS in Massachusetts and several lawyers. A Nanny is an employee because they are hired for an indefinite amount of time and this is her only source or main source of employment making this her financially dependent position. She is an employee at will. A newborn Care specialist is considered a temp job with a definite time, contracted by the family not the NCS. A NCS will be working for multiple families at a time, thus making this not a financially dependent position.
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