Tuesday, April 12, 2011

Can I Pay My Nanny On My Company Payroll?

Nanny Tax Dilemma: Paying a Household Employee on the Company Payroll

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.

5 comments:

Fiona Littleton said...

I've heard mother's recommend this to other mothers.

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Nannies LA said...

Nannies must have your child or children and their welfare as their unqualified primary concern. Seriously consider eliminating any tasks not related to your children and their care from your nanny's job responsibilities. Asking your nanny to perform non-childcare related tasks will take your employee away from what should be their primary focus the care and nurturing of your children. Thanks.

Darcy Grubaugh said...

Compared to office or industrial employees, nannies have personal relationship to their respective families since their job is to take care of them or their children. So, in terms of their payroll, even simple money transfer to their savings account will work for them.