This time of year always brings up lots of questions around nanny taxes. Here are the answers. But before that, my disclaimer. I’m not a tax or legal professional. The information in this article is for information purposes only. Please contact a nanny tax professional for advice about your specific situation.
Q. Do my employers have to pay taxes on my wages?
A. If an employer paid you more than $2,200 in 2020, they must pay taxes on all the wages they paid you, not just the amount over $2,200. It doesn’t matter if you worked full-time or part-time, live-in or live-out, temp or long-term: all employers who met the $2,200 nanny tax threshold are legally required to pay FICA taxes (6.2% for Social Security and 1.45% for Medicare = 7.65% total). Employers must pay 7.65% out of their pocket and withhold 7.65% from your wages. They may also be required to pay other taxes (e.g. state taxes, unemployment). Those are the employers’ responsibility, not yours.
Q. If I made less than $2,200 from an employer, does that mean I don’t owe any taxes on those wages?
A. No. You aren’t responsible for paying FICA taxes on those wages (that 7.65% I talked about above) however, you do need to report the income and depending on your gross adjusted income, you might owe federal or state income taxes. This income is reported differently than regular additional income because of the FICA exception. Check with your tax preparer for how to report this correctly so you don’t pay more than needed.
Q. How do I know if my employer is paying taxes?
A. If your employer is withholding taxes, they almost always will give you a pay stub or print out with your paycheck that outlines how much you earned and how much they deducted. It’s a legal requirement in the majority of states. If you don’t get regular pay stubs, ask your employer to start providing them so you can track your earnings and taxes.
Q. What form should I get at the end of the year?
A. Nannies are considered household employees so you should receive a W-2 from your employer. Your W-2 will list your total gross earnings (how much you made before any taxes were taken out), the and federal and state taxes withheld for you, and any other withholdings required (e.g. state family leave program).
Q. When will I get my W-2?
A. Your employer has until January 31st to give you or postmark your W-2. It’s important to check your W-2 and make sure the numbers listed are correct. Employers, especially those who handle employment taxes themselves, do make mistakes so don’t assume everything is right. Hopefully you’ve been getting (and checking!) a pay stub with every paycheck and know how much you’ve earned and how much has been withheld from your checks throughout the year. If you do find a mistake, bring it to the attention of your employer immediately.
Q. My employer gave me a 1099. What is that and what does it mean?
A. 1099 is the end-of-year earnings statement for independent contractors. However, the IRS has clearly said that nannies ARE NOT independent contractors, they are household employees. If your employer has given you a 1099, they have misclassified you and you should immediately ask them to correctly file a W-2. This isn’t fun. They’ll need to pay back taxes and penalties however, it’s the legal and fair thing to do. One of the nanny tax companies will be able to walk them through the process.
This is an important difference for nannies to understand. Classifying a nanny as an independent contractor rather an employee saves the parent money by costing you MORE money in taxes (you’re paying their share of FICA taxes AND your share). Misclassification also takes away much needed labor protections like unemployment and worker’s compensation. That’s why the IRS has taken such a strong stand on the issue.
Q. My employer swears our situation is different and I am considered an independent contractor. Who should I believe?
A. Employers are often given wrong information by those they trust like family lawyers and business accountants. Household employment is a very specialized field and many outside the field are simply misinformed about the law. IRS Publication 926 clearly states that nannies are household employees. I encourage you to share that resource with your employer and refer them to a nanny tax professional.
Here’s an in-depth look at why correct employee classification is so important and why the IRS has been increasing enforcement.
Q. I’ve been working through an agency and they just gave me a 1099. I thought nannies couldn’t be independent contractors?
A. If you work with an agency and they pay you directly (rather than have the family pay you), you are the employee of the agency, not an independent contractor. The agency is required to pay and withhold all required taxes and provide you with a W-2 at the end of the year. In this case, you’re not a household employee, you’re a regular employee of the business like the recruiter or receptionist is.
Since agencies employing nannies directly is a fairly new practice in our industry, many agencies don’t understand the legal responsibilities involved. Jay Schulze from HomeWork Solutions says, “An employment relationship exists when one party controls the work of another. The IRS considers who sets the schedule, who defines the work to be completed, who establishes the compensation rate, and who takes financial risk by advertising their business. Every arrangement is unique, but in most cases, these factors point to an Agency as the employer.”
Q. When I was hired, my employers said they’d pay taxes but turns out they haven’t been. I still want to pay my portion. What can I do?
A. Before you do anything, talk to your employer. There’s a lot of misinformation about nanny taxes out there and many employers plan to “catch up” at the end of the year. It’s important to figure out what their plan is for handling (or ignoring) taxes before you take any action.
If they haven’t been paying taxes like they agreed to, that means they haven’t reported any of your earnings to the IRS and you aren’t entitled to unemployment or worker’s compensation (unless you report them when you file), won’t qualify for any of the paid sick time or family leave time the next COVID package may offer, you can’t provide income verification for loans or rentals, and you’re not contributing to your Social Security retirement or disability account. However you can still report your income on your return. Before you do anything, let them know your plans and give them the chance to work with a nanny tax professional to catch up on the year’s taxes. If they do that, they’ll give you a W-2 and you’re good to go.
If they don’t agree to catch up, you’ll have to file your taxes without a W-2 and your employer will suffer the consequences of not paying the required employer taxes or withholding the required employee taxes. This is a hard decision to make, knowing the IRS will be notified and your employer will be hit with back taxes, interest and penalties. However, they’re the ones that broke their commitment to you and you deserve to be treated fairly.
Your employer will be required to pay your part of Social Security, however you’ll still be responsible for paying state and federal income taxes on your wages. The IRS can set up a payment plan for you so it isn’t as overwhelming financially.
Q. Can I just pay more taxes and keep my employer out of the whole thing?
A. No. Even if you’re willing to go along with the misclassification and pay taxes like an independent contractor, that doesn’t legally make you an independent contractor. By not classifying you as a household employee, your employer avoids costs that you cannot make up for (e.g. unemployment, worker’s compensation). The federal and state governments lose billions of dollars each year because of misclassification so they have a real interest in pursuing employers who use the wrong classification. No matter what you’re willing to do, you cannot save your employer from their employer responsibilities.
Q. My employer didn’t withhold any taxes from my checks all year and just told me I owe them a huge amount of money. What should I do?
A. Employers are required to withhold Social Security and Medicare taxes on a TIMELY basis. Meaning they can’t come to you at the end of the year and demand you pay them for the past year. If they haven’t been withholding Social Security and Medicare taxes throughout the year, those taxes are now their responsibility to pay. This puts you in a very tough position, especially if you’re still working for them. However, it isn’t your mistake and it isn’t your responsibility to fix it. This is one of those times when you want to send them to a nanny tax professional for help.
Q. I just got my W-2 and realized that my employer hasn’t been withholding federal or state taxes from my paycheck. Do I have to pay them now?
A. Unfortunately, yes. Your employer is not legally required to withhold state or federal taxes for you although most do since they’re already doing the tax paperwork. Even though your employer didn’t withhold those taxes, you’re still responsible for paying them. The IRS can work out a payment plan for you so it’s not as overwhelming. To avoid this issue next year, ask your employer to start deducting federal and state taxes or start saving an appropriate amount from each check and pay estimated taxes quarterly.
Q. My employer and I never talked about taxes so I just assumed we weren’t paying taxes but they just gave me a form to fill out for their childcare spending account. It asks for my contact information and my Social Security number. Do I have to give it to them?
A. Sounds like you and your employer made different assumptions about how taxes will be handled. Or they thought no taxes were fine until they realized how much money they were losing out on between their workplace flexible spending program and the childcare tax credit. Either way, your employers want to make you a legal employee now so they can reap the benefits.
If you worked for them, they’re entitled to the information they asked for. I suggest you to ask them how they plan on handling taxes and encourage them to connect with a nanny tax professional to get a detailed look at how much they’ll own and how much you’ll owe in taxes and possible penalties and fees. When looking at the whole picture, they may change their mind about the course they want to take.
Q. I collected unemployment for several weeks at the beginning of COVID. Do I have to pay taxes on that income?
A. All the unemployment income you collect, including the special COVID add on, is considered taxable income and must be reported.
Recommend Nanny Tax Companies
I recommend Homework Solutions and HomePay by Care (formally Breedlove and Associates for all us old timers) to all my clients. I’ve worked with both of them for over 20 years because they’re true experts in the field and provide exceptional services. This isn’t an area you want to cut corners on. If you have questions about your specific situation, give them a call. Let them know Nanny Care Hub set you!
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