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.
6 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.
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