April 15 is the deadline for income tax filings for a nanny, senior caregiver or housekeeper in the United States.
At a National Nanny Training Day session in Manhattan this weekend, HomeWork Solutions' Kathy Webb was asked the following questions:
Q. I did my taxes last week and found I owe the IRS $1400. I just paid my rent and I don't have enough to pay this now. What do I do?
A. A nanny or senior caregiver can often find themselves in the situation where they owe the IRS more than they have available to pay. This happens to Americans in other occupations too. "The temptation to just not file the tax return is a natural one," reports Webb. "Not filing the return is the worst possible action."
Webb explains "When you owe the IRS and cannot pay on time, you are subject to both penalties and interest. The penalty for not paying on time is 1/2 a percent (0.5%) per month. Meanwhile the penalty for not FILING on time is 5% per month - a very expensive proposition." Webb advises that you file the tax return anyway, on time, and separately contact the IRS to arrange a payment plan.
Q. I got a W-2 from my nanny familiy but they didn't take out any income tax. I cannot afford to pay that now, can I make them help?
A. "Household employers have no legal obligation to withhold income taxes from their household employee's paycheck. The obligation for income taxes is totally the responsibility of the household employee (nanny, housekeeper, senior caregiver)," advises Webb.
Webb goes on to suggest that ALL household workers should receive an itemized accounting of the deductions that are being taken from their paycheck. If the family doesn't use a payroll service, which provides the nanny a check stub, the family can use a free paycheck calculator to do the withholding calculations for the household employee. You can request that the family withhold your income taxes - if they say no, you need to personally set this money asided every pay check and become familiar with filing of quarterly estimated taxes you don't end up in the same place next year.
HomeWork Solutions' Kathleen Webb frequently speaks before groups of household employers and employees, providing educational and consultative information to help them avoid risk and keep their ideal caregiver. Contact HomeWork Solutions if you would like to discuss booking Kathy for your group.
Navigating the roadmap of senior care can be challenging, and the everchanging laws make it even more overwhelming. We are receiving an increasing number of emails regarding the so-called "Nanny Tax," and other concerns surrounding private household employment of senior caregivers. In response to these questions, we decided to address the top three Elder Care FAQ’s.
1. I have a domestic worker working in my home. Do the "Nanny Taxes" apply to me?
Including nannies, a domestic worker is defined as an aide, companion, housekeeper, cleaning lady, maid, cook, personal assistant, house manager, caretaker, butler, valet, and driver. Almost all household workers are employees, not independent contractors, and understanding the difference between filing a W-2 and a 1099 is key.
Read more about payroll tax requirements of the Internal Revenue Service here.
2. Can I hire my daughter as a caregiver?
Some families are fortunate enough to have a family member willing to provide elder care and wish to compensate them for their work, especially if there are lost wages associated with the care. In most situations, the IRS considers employed family members taxable employees.
Get more information on how to hire a family member as a household employee here.
3. I have heard that I can get a personal tax break for dependent care. Is that true?
There are two ways that families can minimize their personal income taxes to help offset the cost of dependent care. The first is through a flexible spending account, which may be offered by the employed spouse’s company. Another strategy is the Child/Dependent Care Credit, which can directly reduce the taxpayer's income taxes between $600 - $1,465 a year. Read more about the criteria for receiving a personal tax break for dependent care here.
If you would like more information about household employee taxes, download our Guide to Privately Employing Senior Home Care.
In a triumphant win for labor unions and worker advocacy groups, the Obama administration made sweeping reform in mandating that home health workers, personal care aides and certified nursing assistants who provide care to the elderly be paid minimum wage and overtime. While it may affect the bottom line for families of aging relatives, over half of senior care givers were living at or below the poverty line.
According to the U.S. Department of Labor, over 2 million caregivers will now receive the same basic protections- such as benefits and overtime protections- already provided to most U.S. workers. The benefits are two-fold:
- It will guarantee that consistent, high quality senior care will come from a professional, trained workforce. In a recent article on PeoplesWorld.org, Sarita Gupta of Jobs With Justice is quoted as saying that "this is a major victory for the present home health workers [and] for the millions more who will be needed in the coming years as the U.S. population ages."
- The new laws reduce employee turnover and increase the number of committed workers who enter and stay in the home care profession. Dustin Distefano, CEO of A Place at Home, an agency that provides in-home senior care, says in an article on Omaha.com “[This is] especially beneficial to those with Alzheimer's disease or dementia, who might prefer one caregiver.”
These benefits are extended to legal, documented employees, whether they are agency employees, referred by agency or registry servcies, Craigslist, newspapers or word-of-mouth through friends and family and go into effect nationwide on January 1, 2015.
President Obama spends a day as a home care worker
In a video issued by the White House, President Obama spent a day in 2007 with a home care worker as he was evaluating minimum wage and overtime legislation when he was a senator. In her piece in Forbes.com, “Hiring Help For Aging Parents? Read This First.,” Ashleah Ebeling hosts the video , which articulates support for wage protection now provided to home care workers.
Download our free Household Employee Tax and Payroll Guide now.
A bill to increase the Massachusetts minimum wage and grant extended legal protections to Massachusetts' nannies, housekeepers and senior caregivers passed the Massachusetts House 125-24 April 4, 2014. The bill will move to the Massachusetts' Senate where stand alone minimum wage legislation (no linkage with domestic workers' rights) has previously passed. The two chambers will have to reach an agreement on the differences between their respective bills.
Of particular interest in the House bill is the extension Massachusetts Maternity Leave Act to household employees such as nannies and senior care givers. This would mean any female household employee who has worked for a family for three months or longer would be entitled to eight weeks of unpaid maternity leave with the guarantee to return to the job. It would allow employees giving birth or adopting to notify employers at least two weeks in advance of her planned anticipated date of departure and of her intention to return the right to keep her job. A household employer would not have the right refuse to grant MMLA leave on the grounds that doing so would constitute a hardship. This would be the first time that maternity leave with a guaranteed right to return was a "right" of a nanny, housekeeper or senior caregiver.
HWS encourages you to subscribe to this blog feed for updates on this and other areas of interenst to household employers and employees such as a nanny or senior caregiver.
Usually around this time of year we start getting worried phone calls from families confused by the household employee taxes or the "nanny taxes." We pulled together some more of the frequently asked questions our tax experts are getting in time for April 15th.
Q. My domestic (elder caregiver, housekeeper, nanny) wants to be treated as a "contractor." Can I do that?
The IRS has strict definitions of employees and independent contractors; a domestic employee is a worker whose services, hours and obligations are directeded by the employer. A contractor sets their own schedule, performs the work wherever they choose and provides their own equipment. For household workers - including nannies - a family defines the work to be done and sets the work hours, and so is obligated for all payroll tax filings. Generally, a domestic worker in your home is not a contractor, but an employee who you pay directly and for whom you must file payroll taxes.
Read more about payroll taxes for your household employee here.
Q. How are household employee payroll taxes paid?
Most household employees are required to pay Federal employment taxes including Social Security tax, Medicare tax, withheld Federal Income Tax (if applicable), and the Federal Unemployment Tax. They are also likely to file State unemployment taxes. It is the employer’s responsibility to collect these taxes out of their employee’s gross pay, and contribute employment taxes out of their own funds. Many families negotiate personal arrangements with their domestic workers; some employers agree take on the additional cost of employee Social Security and Medicare taxes as a benefit to their employee while others deduct these taxes from the employee's gross pay. In either event, the family pays both employer and employee Social Security and Medicare taxes directly to the IRS.
It is important to note that the Federal household employment taxes are part of your personal Federal Income Tax Return, which you sign under penalties of perjury.
View our comprehensive video on how to calculate household employment taxes.
Q. What may happen if I don't pay the employment taxes for my housekeeper or home health aide?
In short, failure to report domestic wages is tax fraud and may result in penalties of perjury. Fees related to becoming current with back taxes can significantly reduce an elder’s estate and delay distribution of that estate.
There are significant benefits to an employee when they are paid legally. Most important for elder caregivers, they will qualify for unemployment benefits while they search for another position if an employer dies or is moved to a senior care facility and their position is terminated.
To get more information about becoming current with any unpaid back taxes, click here.
Hiring a nanny to care for children, or a caregiver for an elderly family member can be very expensive. These employees often work long hours and your need for their services is generally perpetual. The high cost of employing household workers often makes it tempting for families not to report paid wages, since reporting carries additional financial requirements related to unemployment insurance and other benefits. However, the risks to families who do not pay their domestic employees "on the books" are considerable.
If you pay your domestic employee off the books, you and the household employee are committing tax fraud. You file federal income taxes on penalty of perjury, and failing to report domestic wages can potentially be charged as a felony offense.
If you are caught, both you and your employee will be responsible for back taxes and penalties, not to mention legal fees incurred during the process. There is no statute of limitations on this crime, which means that you could get caught at any point in the future. Even after the employer's death, the estate can be held liable for back taxes.
Unemployment & Social Security
Tax contributions to unemployment insurance is a required component of employment, as is the payment of Social Security and Medicare taxes. If a household employee is paid "off the books," and these benefits are not funded by the employer, situations still exist where this omission can be revealed. For example, you may have to let a nanny or caregiver go because the children grow up, or living conditions of an elderly relative shift from at-home to a live-in care facility; or an elderly person may have passed away. At any point, the employee may file for unemployment or social security benefits, even many years down the road. This is often the point where families get caught not paying the required taxes and insurance for domestic employees, as the issue is brought to the attention of the government.
On the flip side of this issue, paying a domestic employee on the books means that your employees have a safety net. Sharing or assuming the tax, social security, workers' compensation and unemployment requirements means your employee is protected against unforeseen circumstances, and this constitutes the right thing to do from both a legal and ethical perspective.
Affordable Care Act Benefits
Many household workers such as a nanny, housekeeper or senior caregiver are income qualified for federal tax subsidies that help keep their health insurance affordable. The IRS administers these tax subsidies, and a household worker must have their income on the books to receive the subsidy. Nanny tax compliance becomes more of a family moral imperative when your worker's health benefits are on the line.
If you have a domestic employee, it's very important to invest in workers' compensation insurance, which you can't simply buy if you pay a nanny or caregiver off the books. Without this insurance, you will be personally held liable in the event that a worker decides to sue you after being injured on the job. Elder care involves a great deal of manual labor in the form of helping the senior get in and out of the bed or car, which can often result in back injuries. As a result, the possibility of being sued for workers compensation is one of the risks to families who do not pay their domestic employees on the books. Although some people feel that their employee would never sue for workers compensation, the fact is they have the legal right to compensation for injuries incurred on the job. In the event of expensive medical care, suing an employer is often the only option available to pay for medical care, particularly if the injured party doesn't have health insurance.
Although paying a household employee off the books without reporting wages to the government can seem like a simple or even logical solution to taxes for both you and your nanny/caregiver, the risks to families who do not pay their domestic employees on the books are simply too high. Beyond the moral imperative to pay a domestic employee on the books, there are practical reasons that make this essential an essential step to insuring a secure future for all involved.
Workmen’s Compensation Protects Elder Care Families, Too
Hiring household employees presents a unique example of the value of Workmen’s Compensation. Elder care workers, nannies and caregivers for the disabled are often confronted with routine physical work that can develop into chronic injury. Without it, employees have limited coverage in the event of an on-the-job injury. If an employee is without health insurance, has a very high deductible, or only has poor coverage, the other avenues for recourse are timing consuming and bureaucratic. In fact, the employee may have no other recourse but to sue an employer for medical costs or lost wages.
It is not unusual for a nanny or home health aide to sustain back injuries due to the strain of lifting, moving, dressing and hygiene activities related to proper care. The nature of the work demands fair compensation for medical bills and lost wages associated with the work, and Workmen’s Compensation provides this without it, employers and their families are subject to lawsuits and financial risk.
Worker's compensation is required by many states, including California, for people who employ household employees including elder care workers, nannies, housekeepers, gardeners, and cooks. Worker's compensation is an efficient way for employers to protect employees, since it only pays for healthcare costs and lost wages that occur in the case of an on-the-job injury; it is a form of protection for all parties, not a form of health insurance. Even in states where there is no legal mandate for worker's compensation, it's still a good idea to protect your family by investing in it.
Risks when Compensation Is Not Available
If you do not have workmen's compensation, you will be personally held liable for the lost wages and medical bills of your injured employee. With the magnitude of modern health care costs, being sued for these costs can be a devastating, or even bankrupting event.
Workers are entitled to compensation for a wide range of on the job injuries, including those as simple as slipping and falling on the job. Except in cases of negligence, your employees are entitled to compensation for their injuries regardless of fault.
Benefits to Worker's Compensation
There are numerous benefits to getting workmen's compensation when hiring household employees. Not only do you protect your own family against legal action, you also protect your employee in the case of injury. Although employees have recourse through the legal system in the event of injury, it can take months for such cases to be resolved, and in the meantime they are responsible for paying their own bills, which can become very costly. With workmen's compensation, injured workers are able to receive the compensation they are entitled too much more quickly. This is especially important for low-income workers, or for those who have sustained serious injuries.
Obtaining Worker's Compensation
Getting workmen's compensation when hiring household employees need not be an expensive or complicated process. In fact, in California, worker's compensation is easily available as a rider to your home owner's policy. However, you should never assume that it is automatically a part of your homeowner's policy, because you will need to add it on to your existing policy. When it comes to cost, the exact premiums will depend on the number of employees, the type of coverage, and the work the employees do. Your insurance company will be able to give you policy and premium details.
For more details on paying your household employee on the books, download our free Household Payroll Guide.
Let’s face it: sitting your aging parents down to talk about their finances is about as comfortable as talking to them about sex (eons ago, they probably felt the same way you do right now!) But just as it was back then, the conversation- though difficult- is imperative to your future decision making.
In a recent article, Forbes contributing writer and founder of AgingParents.com Carolyn Rosenblatt offers up some creative ways to broach the subject without being confrontational:
Beat Around The Bush: It may feel misleading, but it will keep the conversation relaxed. Casually mention a recent disaster (hurricane, flood, fire, etc) which affected other people and ask what they would do if they were in that type of emergency situation. If their answer is vague, point out that it’s important for them to have control of their care and sharing their wishes with you will make it easier for you to follow through.
Use Clear Examples: If your parent insists on brushing you off, point out the consequences of being in the dark about their finances. Should they not be in a capacity to manage their bills, how would you be able to take over for them? Electricity and heat could be shut off, insurance payments would lapse, and the results could be catastrophic. Don’t be afraid to illustrate how their care can be compromised if your attention is being spent on problems that could have been avoided.
Nurture The Seed: Now that you’ve laid the groundwork, your parents are likely to understand the benefits of transparency. This is a perfect segue into a conversation about power of attorney, health care proxies and other legal matters. In a Caregiver’s Handbook published on PBS.org, you can find a basic introduction to these legal documents as they relate to elder care.
Above all, make certain that your parents feel in control of their future. Remember, the conversation is about how you can help them execute their wishes.
If you would like more tips on managing elder care, please download our Senior Health Check List.
GCMs Can Facilitate the Family Conversation
Families know that a comprehensive, legitimate pre-employment background check, thorough reference checking and organized behavioral interviewing questions are the gold standard in nanny recruiting. The careful background screening is a must, but you should not be lulled into thinking that just because a nanny that passed these 3 steps with flying colors you don't need to pay attention and observe the nanny on the job.
Even the best nanny background screening will not reveal:
- Honesty: Whether the question is from you or your child, you want a nanny who will be truthful. Honest communication, with age appropriate boundaries, is a key attribute to a successful nanny.
- Patience: The teething baby who is whiny and just needs to be held, the child who wants Frozen's Let It Go played for the 10 time in a row, and the 1st grader who requires extra time and assistance mastering this weeks 10 word spelling list all require a patient, engaged caregiver.
- Excessive Cell Phone Usage: From talking, chatting, Facebook, Angry Birds and Words with Friends - the distractions that the nanny's phone presents result in inattention to your child's needs and safety and of course will limit her interaction with your child. You want a nanny that understands electronic boundaries and parks her phone in her handbag during the day.
- Reading Skills: A nanny who reads poorly or just plain doesn't enjoy a good children's book will not read to your child, an important activity supporting your child's language skills, comprehension, and problem solving skills.
- Inappropriate or Excessive TV Time: Most families understand that some TV viewing will occur when your nanny is caring for your child. When weather prohibits outdoor time, a child is mildly ill or even when nanny needs 30 minutes to prepare a meal or clean up after one appropriate (as defined by you the parent) TV viewing is generally acceptable. You may approve of Dora the Explorer, your nanny may prefer her favorite adult themed soap opera or even Law and Order: SVU.
- Gossip: Nanny background screening will not reveal the nanny with loose lips. An argument between parents or a child's learning difficulties should not become common knowledge at the park.
- The Busybody: Nosy or intrusive questioning, injecting opinions inappropriately and just plain snooping will reveal themselves in the work environment, not the nanny background screen.
- Daily and Weekly Planning Skills: The ability to organize a day to include the mundane (meal preparation, children's laundry) and the entertaining (outdoor play, games, arts and crafts projects) is an important childcare attribute.
- Initative: Outstanding nannies have problem solving skills, recognize opportunities, and display the initiative to teach the child to tie his shoes when he is ready to learn, or share with the parents ideas and suggestions for activities, crafts and the like. The ability a nanny to recognize a need and fill it without being asked is priceless.
- Personality Match: You need a nanny you can communicate with, who responds appropriately to your queues and may even share your sense of humor. The interview is like dating, the job is closer to marriage.
So do make sure you carefully interview, reference check and background screen all candidates. Do not expect that to be the end of the process! After hire keep lines of communication open, ask questions, drop in unexpectedly, and observe and be on the watch for any red flags. Do trust, but make sure you verify.
Order Household Employee Pre-Employment Background Check
In an inspiring and forward-thinking section of the New York Times on innovations in retirement, an article on innovative solutions to senior living offered news on several fronts. While most readers will be familiar with the existing alternatives such as in-home senior care, assisted living and independent senior living options, the article features new ideas that will certainly gain more traction as the baby boomer population ages. Often referred to as "aging in place," here are some examples highlighted in the article:
- Home Analysis: The AARP recommends that a Geriatric Case Manager or social worker come to a home an analyze senior needs, and the home environment. It is best to have this resource accessible as needs change almost as quickly as solutions are devised.
- "Age-in-Place Certification" The National Association of Home Builders developed this certification for home modifications to teach contractors how to adapt homes. Although this certification was developed nearly 12 years ago, most home owners and their families are not aware.
- "Villages" A new approach called 'villages' establishes a network in a local area to provide transportation services, home repairs, snow removal, food shopping and other daily, weekly and circumstantial needs. Typically, a group hires a manager to coordinate work across the participating seniors. According to the University of Maryland’s Center on Aging, there may be 80 of these villages established nationwide in the last 10 years, and up to 120 new such arrangements are in the planning phase. This creative approach seems likely to accelerate among boomers who continue to want control over their living circumstances as they age.
- Electronic Devices help with routine. A 2011 study by the AARP predicts that about 25-50% of seniors over 65 are willing to use electronic devices such as smart phones and tablets to remind them of medication, exercise or other time-oriented necessities, and to alert care givers when routines are disrupted.
Subscribe to the Home Work Solutions blog for more information on innovations and solutions in Elder Care.
Regardless of whether your household employee is full time or part time, employers are required to pay employment taxes if the employee is paid $1900 or more per year (in 2014).
"Household employee" is a term that includes domestic workers such as nannies, housekeepers, elder caregivers, home health aides and house managers. These workers are NOT independent contactors. For these employees, employers are responsible to pay Social Security, Medicare and Federal Unemployment Taxes (FUTA).
In order to avoid penalties, household employers should have the following forms on hand:
- Form SS-4: For obtaining an Employer Identification Number
- Form W-2: Shows the amount of taxes withheld from your paycheck for the year and is used to file your federal and state taxes
- Schedule H: Helps calculate your employment taxes
- Form I-9: Verifies the identity and employment authorization of individuals hired for employment
- Form W-4:Used by employees to instruct employers on their withholding tax status.
Families all too often misclassifiy their household employees as contractors, and these employers incorrectly issue their household employees a 1099 tax form. A 1099 is exclusively used for independent contractors, which are employees that set their own hours, supply their own tools/machinery required to perform the job and offer services to the general public. Misclasification and filing incorrect tax paperwork can lead to fines, imprisonment and overwhelming legal fees.
Read more about the different tax obligations for independent contractors and household employees here.
The IRS estimates that a family will spend 40 - 60 hours a year on nanny tax compliance research, paperwork and filings. HWS offers a variety of flexible service plans that range from $525 - $850 per year. We offer free telephone consultations at 800.626.4829.