According to a report released by the National Taxpayer Advocate Nina E. Olson, the number of tax returns the Internal Revenue Service decided needed additional screening for possible fraud and/or identity theft in 2011 exceeded 1 million, a 72 percent increase over 2010. The office of Taxpayer Advocate is established as an independent watchdog within the IRS and it reports annually on the agency's performance.
Of real concern is the instances where the valid SSN holder doesn't know that their number is being used, as the IRS has no mechanism for advising the true account holder of the possible identity theft.
Household employers have legal obligations to protect the personal identifying information of individuals they employ in their home, and are wise to be prudent in verifying the background and identity of individuals they bring into their private homes and employ as care givers for their vunerable family members.
The first indication that many household employers have that the taxpayer identification of their household staff may be suspect is receipt of a Social Security Administration "No Match" letter. This advises that the SSN and the name on a Form W-2 do not agree with SSA records.
How does a household employer verify identity information of newly hired employees?
- Perform a pre-employment background check that includes a SSN trace. Families can order these checks from the HomeWork Solutions' website.
- Complete the Form I-9 with the new hire at time of employment and make sure you look at the identity documents.
- Consider using e-Verify, the online system developed by the Department of Homeland Security for pre-employment screening that matches candidate information against government databases to validate employment eligibility. e-Verify Self-Check, a USCIS sytem that allows job applicants confirm their work eligibility before they apply for a job, is rolling out nationwide. Self-Check does NOT relieve the employer of the obligation to comply with I-9 regulations.
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Republished from January 2010)
In an incredibly interesting and complicated court case involving:
- Wrongful Discharge
- Breach of Employment Contract
- Unpaid Wages
- Unpaid Overtime
The United States District Court, D. Oregon affirmed that nannies are indeed non-exempt employees and are entitled to hourly pay and overtime pay for hours worked in excess of 40 in a work week. The court further affirmed that a work agreement that was expressly for a 24 month period of time (rather than "at will") was enforceable.
If you employ a nanny, or are considering employing any household employee, I encourage you to read the court's decision. This is a text book case of what an employer should not do in household employment.
HomeWork Solutions' online FAQ provides detailed discussion of many of the FLSA issues addressed in this case, including the applicability of overtime in household employment. Our free sample nanny work agreement templates specifically address "at will" employment.
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We are receiving an unusual number of phone calls this year related to e-Filing issues. Here are the most common issues. In all cases filing a paper tax return this year is the corrective action needed.
#1 Household Employer in a "Credit Reduction State"
20 states who took Federal loans to continue funding the payment of unemployment benefits are in arrears in their repayment of the loans. As a consequence, employers in these states (called Credit Reduction States) have surcharges imposed on their FUTA taxes. The IRS e-filing systems are preventing the electronic submission of tax returns with a Schedule H with the Credit Reduction State Worksheet.
The states include: Arkansas, California, Connecticut, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, North Carolina, New Jersey, Nevada, New York, Ohio, Pennsylvania, Rhode Island, Virginia, Virgin Islands and Wisconsin.
#2 Household Employee with a Form W-2 from a First Time Employer
The IRS has very strict controls on its e-File system to protect against fraud and abuse. Consequently, the employees of new household employers will need to file a paper return. The second year after an Employer Identification Number (EIN) has been issued, the fraud control measures will recognize the EIN has having been used in a prior tax year and the employees will be able to e-File.
#3 Either Employer or Employee is filing their First Ever US Income Tax Return
Similar to #2 above, fraud control measures do not recognize the newly issued Social Security Number and will block e-filing.
Our Annual Payroll Tax Filings FAQ will answer these and other questions that household employers may have.
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The Form 1040 Schedule H is the vehicle that household employers use to report wages paid and employment taxes due for household workers. This form is a bit more complex for 2011 due to 2 significant events.
- In 2011 the Federal Unemployment Tax (FUTA) rate changed mid-year. If you fully paid your state unemployment taxes on time, you receive a credit and pay an effective rate of 0.8% for FUTA-wages paid January - June and 0.6% for FUTA-wages paid July - December.
- 20 states who took Federal loans to continue funding the payment of unemployment benefits are in arrears in their repayment of the loans. As a consequence, employers in these states (called Credit Reduction States) have surcharges imposed on their FUTA taxes.
- Eighteen states and one territory will have a credit reduction of 0.3%: Arkansas, California, Connecticut, Florida, Georgia, Illinois, Kentucky, Minnesota, Missouri, North Carolina, New Jersey, Nevada, New York, Ohio, Pennsylvania, Rhode Island, Virginia, Virgin Islands and Wisconsin.
- Michigan will have a total credit reduction of 0.9% (0.6% in 2010).
- Indiana will have a total credit reduction of 0.6% (0.3% in 2010).
For background information about the credit reductions, visit this website. If you live in a Credit Reduction state you may be prohibited from e-filing your Federal return this year. The IRS' e-filing systems are apparently not equipped to accept the "Worksheet for Household Employers in a Credit Reduction State" which is necessary to compute FUTA tax owed.
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A quality nanny placement and referral agency can be a life saver for families hiring a nanny, especially for first time employers and families with newborns. The plethora of on-line options almost leaves more questions for families than they answer. Families wonder:
- What are the qualities of a good nanny?
- How do I check the references and ask the right questions?
- How do I do real background checks?
- What are the standard compensation and benefits practices in our area? How do we know we are competitive, and not under paying or over paying?
An experienced, reputable nanny placement and referral agency can help families with all of these issues. To learn more about how to select a quality nanny placement and referral agency, download our free tip sheet, 10 Tips: How to Choose a Nanny Agency.
HomeWork Solutions partners with select nanny and household staffing agencies nationwide to provide free payroll and employment tax consultations to their client at time of hire. Addressing these issues at the beginning of the employment relationship gets everyone off on the right foot and demonstrates the hiring family's intent to treat the nanny or housekeeper professionally. We encourage hiring families to take advantage of HomeWork Solutions' free consultation and avoid unpleasant surprises and unplanned expenses when tax filing occurs.
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Do you have a regular person who comes to your home to provide housekeeping, maid or cleaning services? Do you know that this individual is probably your employee under common law and the Internal Revenue Code?
Any individual whom you employ to provide services in your home whom you pay directly AND whose total payments in the calendar year meets the IRS household employment threshold ($1700 in 2011 and $1800 in 2012) must receive a W-2 from the employer (family) and the employer must pay the payroll taxes.
Household employment taxes - known as the "nanny taxes" - include:
- Social Security & Medicare Taxes (13.3% of Gross Wages - employer may collect 5.65% from the employee via deductions.)
- State Unemployment Taxes where required.
- Federal Unemployment Tax (FUTA) where required.
The employer is legally obligated to pay (remit) both employee and employer portions of Social Security and Medicare taxes. Should the employer fail to collect this tax from the employee via periodic payroll deductions, the employer remains responsible to remit or pay the tax to the IRS. The household employee CANNOT remit their share of Social Security and Medicare tax independent of the employer.
Many families try to classify their weekly (bi-weekly, monthly) cleaning ladies as independent contractors. In the vast majority of circumstances, this is a total legal fiction. This usually only works if the worker is properly incorporated, bonded and licensed in the trade and maintains "corporate formalities."
If you wish to avoid this obligation, we recommend that you engage a cleaning service. The service will decide who to send to your home to do the cleaning, and you will avoid any payroll tax obligations. Examples of such firms are Merry Maids, the Maid Brigade, XYZ Cleaning Services, Molly Maids - you can locate by Googling "home cleaning service YourTown YourState." When you hire a service, you make your payments to Cleaning Services Inc. or Cleaning Services LLC - and not to Mary Jones.
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The US Department of State has issued non-immigrant visas to the personal attendants, servants, and maids of certain diplomatic and non-governmental staff members under G-5, A-3 and NATO-7 visa categories for many years. Guidelines for the sponsoring staff members were very broad, and subject to interpretation by the various sponsoring organizations.
In September 2009 the US Department of State issued new guidelines and recommendations to sponsoring organizations intended to standardize the basic terms and conditions of the G-5 domestic's employment. They also, for the first time, placed responsibility for the enforcement of these guidelines squarely on the sponsoring organizations.
HomeWork Solutions provides payroll and payroll tax services to hundreds of G-4 staff members working for non-governmental organizations such as the United Nations and the World Bank when they sponsor a G-5 domestic. We are recognized subject matter experts. We recently published a free e-book, G-5 Domestic Payroll Quick Start Guide, to help the G-4 sponsor better understand their obligations.
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IRS data places "nanny tax" compliance (declaration by families of their household payroll) at about 20%. Household employment experts believe even this number is optimistic. Looking at these statistics, a new household employer has to think that just ignoring this complicated and expensive issue is relatively risk free. What these numbers don't illustrate is the steadily increasing political pressure on the IRS to collect revenue, and the relatively low hanging fruit the "nanny taxes" present. Add to this the very real possibility that the elder care giver or nanny may file for unemployment benefits when the job ends, and the risk evaluation changes dramatically.
The "nanny taxes" are not just for nannies! If you hire someone to provide personal services in your private home - a housekeeper, house manager, maid, or elder care giver - you too are likely to fall under rules surrounding the "nanny taxes."
In today's economy housekeepers and nannies are finding that good jobs take longer to secure. The household who let's their off-the-books household staff go, for whatever reason, should be seriously concerned about their former employee filing an unemployment claim. The maid who was perfectly content to receive tax fee income experiences a reality check when they have no income for weeks, or months. Suddenly, filing an unemployment claim seems the only option to avoid eviction or to put food on the table. Once that claim has been filed, the whistle is blown on the former household employer. Since state unemployment systems share this information with the IRS, everyone is on notice that the family employed the nanny and that there are no tax returns on file.
This is when the laws of unintended consequences come into play.
The financial risk to the household in these cases is significant. The household employer has the obligation for remittance of the payroll taxes, not the nanny. A housekeeper who was being paid $500 cash has little or no income tax obligation on her wage - her risks for coming forward are nominal, and insignificant in the face of her lost earnings and need for unemployment benefits. The family, however, has approximately a $3700 back tax bill for just one year - and that is before penalties, interest, and the cost for professional assistance amending previously filed income tax returns. Consider for a minute that in metro areas a nanny's cash wage is often $600 - $800 a week or more and the liability grows substantially.
The family considering employing any household staff - nanny, housekeeper, maid, elder care giver - and skipping the household payroll taxes needs to seriously consider their risk tolerance.
If you employ a nanny, chances are strong at some point you will need to let the nanny go. There are myriad reasons a family fires a nanny. The children grow up and your beloved family nanny is no longer needed. Perhaps the nanny has horrible work habits - always late or a frequent 'no show.' Your family and the nanny simply may not 'click.' The nanny who was a wonderful nurturer of your infant does not have the energy to deal with your demanding toddler. Whatever the reason, firing a nanny can be an uncomfortable experience for both family and nanny.
Below are some tips and best practices when letting the nanny go.
- Be compassionate: It is best to break the news at the end of a work day and away from the children.
- Don't draw out the conversation: Short and simple are the best way to deliver the news.
- Notice: : If you have a written work agreement, you will most likely have a notice provision already agreed to. Adhere to it. If you require x weeks of notice from the nanny, be sure you return the courtesy, or provide pay in lieu of the notice.
- Letter of Recommendation: Letter of Reference When you are separating on amicable terms, please consider writing a letter of recommendation, and making yourself reasonably available for telephoned reference checks.
- Taxes: Your nanny may be eligible for unemployment compensation from your state fund. This is true even if you were not properly reporting her wages to the state!
What if you were paying under the table? The state unemployment agency will look back at the last one - two years of the nanny's employment. If you did not report/pay your unemployment taxes, you will be subject to administrative action, including reporting to the IRS, and may be charged with the entirety of the nanny's unemployment benefits. Unemployment insurance (tax) for the full time nanny averages $300- 500 a year - when paid on time. A nanny's benefits may be $200 - 400 per week for up to 99 weeks. That could be $20,000- 40,000 directly charged to you for failure to pay the requisite employment taxes.
- Security & Family Property: Request that nanny at the time of separation return all house and car keys, as well as any remote devices.
Download the Complete 10 Tips: How to Fire a Nanny
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Are you ready to compute your 2012 payroll?
The 4nannytaxes.com household payroll calculator has been updated with new withholding tax rates for 2012. Clients who write their own paychecks, please confirm your withholding calculations before issuing any 2012 payroll as there are many income tax rate changes!
New York and California employers, please remember that your state's Wage Theft Protection Act obligates you to provide certain pay rate notices, in writing, to your household employees, including their hourly regular and overtime rates of pay.
Minimum Wage Updates
Nannies, housekeepers, elder caregivers, and most house managers are considered Hourly, Non-Exempt employees under the Fair Labor Standards Act. This means that most are covered under both minimum wage and overtime laws.
For 2012, eight states increased their minimum wage. They are Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont and Washington. Additionally the City of San Francisco (CA) minimum wage increased.
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Download our free tip sheet: 10 Tips: Avoid Common Nanny Payroll and Legal Mistakes
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