This week we are discussing common nanny tax dilemmas. Yesterday, Tom Breedlove of Breedlove & Associates explained the common misperception that families can classify a domestic worker as self employed (an independent contractor). He explained that the IRS has ruled definitively that nannies and most other domestic workers must be classified as employees. Click here to see that article.
Another common mistake parents make is paying their nanny on their company payroll. This happens when bookkeepers and general/business tax accountants don’t understand the nuances of household employment law.
If a parent owns a company, they will need to manage their household employee’s payroll separate from that of their company’s employees. The logic is that businesses are allowed to take tax deductions on their business payroll expense. The IRS does not view nannies and other household employees to be direct contributors to the success of the business enterprise. Therefore, these wages cannot be reported on a business tax return and any tax deductions taken on these wages are illegal.
Instead of paying a nanny through the company payroll and taking a business tax deduction, families should pay her through their personal bank account and take a personal tax deduction on their federal income tax return.
In addition to the incorrect reporting and illegal tax deduction issues, there are related problems with group health insurance. Insurance providers generally do not allow personal employees to be included on a company policy. As a result, it may result in denied claims and, in extreme cases, insurance fraud.
Tom Breedlove is a Partner at Breedlove & Associates, the nation's leading specialist in payroll, tax, and HR services for household employers.