Arden Dale for the Wall St. Journal writes: Employing a nanny or other household workers can open a can of worms with the Internal Revenue Service, but the agency wants to make it easier for someone who mishandles taxes for their hired help to put things right.
The current tax preparation season is a time when questions often surface about how employers of household help have handled--or not--the withholding requirements and other tax issues, financial advisers say. This year, the IRS is allowing more people to enter a special program that eases penalties for those who haven't been following the rules--but only until June 30.
A lot of people either aren't familiar with the rules or don't want to be bothered to jump through all the hoops. They may pay a nanny under the table or treat the worker as an independent contractor. That can prompt an audit and lead to penalties.
In some extreme cases the so-called nanny tax issue has even derailed some presidential cabinet nominees. The most famous case is that of Zoe Baird, whose nomination for attorney general in 1993 was pulled after it was disclosed she and her husband failed to pay payroll taxes for two household workers. The matter helped raise awareness of the issue--which the media quickly dubbed "nannygate."
ome advisers, like Murray Stoltz, president of Vermont-based firm Manchester Capital Management LLC, say knowing about clients' hired help is part of their job. "Our dialogue with the client is close enough that we know this is part of their financial and home world," he says.
Other advisers acknowledge that clients sometimes keep employees secret--or simply don't think to mention them.
Adviser Renee Kwok underscores the need for correct reporting whenever she learns a client has a nanny. "But our role is not to be a policeman or whistleblower for the IRS either," adds Ms. Kwok, president of TFC Financial Management in Boston.
As she recently did with a doctor client, who has four children under the age of four and a nanny to care for them, Ms. Kwok often recommends outsourcing employment to a payroll expert who fully understands the sometimes complicated rules.
The IRS, revising a program it started in 2011, has made it easier for those who haven't been following the rules. It lets employers reclassify workers they had been treating as non-employees or independent contractors. It foregoes interest and penalties, as well as most tax due for previous years, for employers who have been issuing Forms 1099. Those who paid workers under the table in some years may also be eligible but would have to pay more tax and some penalties.
Employers with all kinds of workers, not just household help, are affected by the program. In the past, taxpayers who misreported could only get a settlement if they had been audited, according to IRS spokesman Eric Smith. "This means you don't have to wait to hear from us," he says.
Stephanie Breedlove, who is co-founder of a household tax and payroll company in Austin, Texas, recalls how one family came to her this year: A nanny they employed had tried to use a national tax preparation company to file her taxes as an independent contractor. That tax preparer refused, insisting she go back to her employers and have them report on her properly.
This scenario may become more common as the IRS steps up efforts to get employers to follow the rules--which call for the withholding and paying of Social Security and Medicare taxes if a worker is paid $1,800 or more for 2013.
A further complication: There are separate and, often different, federal and state employment requirements. Some states insist employers pay workers' compensation and unemployment insurance, for example.
The IRS requires quarterly wage reporting, as well as annual filing of Form W-2 and Schedule H. Throughout the year, the employer withholds Social Security and Medicare taxes, along with any applicable state taxes, from the worker's paycheck.
A couple that sought accountant Brian Schultz's help decided to look elsewhere when he told them about the tax rules, he recalls. A veterinarian and his wife with a day-time babysitter, they seemed surprised to hear they would have to file a W-2 form and payroll taxes.
"They weren't excited about it," and they left, says Mr. Schultz, who works closely with a wealth management team at accounting firm Plante Moran PLLC in Southfield, Mich.
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Valerie, you couldn't be more off the mark with this. By not treating domestic employees like any other employee, i.e. payroll, taxes, etc., it hurts the employees. By paying them legally on the books, they get unemployment insurance, can start a retirement account, build a credit and work history that are crucial should they need to look for another job. Employing a nanny or other household worker is a BUSINESS! Just because they work in the home doesn't make them any less of a legitimate employee than if they worked in an office. Being a nanny is a career, and proper taxes and payroll need to be followed.
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