Nanny Tax Update
Volume 6, Number 19
Issue 254
A taxpayer who employs a household worker, who is not considered an independent contractor (defined by very specific factors), has tax filing responsibilities similar to any other employer.
Under the old (prior to 1994) rules governing taxes paid on household workers, anyone paying a domestic worker, who is also considered an employee, more than $50 every three months was required to file quarterly payments on Social Security and Medicare taxes.
In 1994, Congress raised the filing threshold and reduced the filing requirement to once a year on a taxpayer’s Form 1040, after the nanny tax became a nationally publicized issue. At that time, most people were unaware that such a responsibility existed.
It was believed that raising the filing threshold (for 1998, it is $1,100 in annual wages) and reducing the filing requirement to once a year would encourage more taxpayers to comply with the law. However, this has not been the outcome. The number of people paying taxes for their nannies and maids has actually declined since the tax law changes. Estimates show that fewer than 1 in 13 families are declaring their household workers’ wages on their income tax returns and are paying the taxes owed.
Many people believe that a simplification of the tax rules did not solve the underlying problems. Many taxpayers do not want to pay unemployment taxes and the employer’s shares of Social Security and Medicare taxes, which total 7.65 percent of a worker’s salary. Other taxpayers do not want to expose the fact that they are employing illegal aliens. Additionally, many household workers ask to be paid “under the table” because their wages are low and they cannot afford to pay payroll taxes.
Tax filing responsibilities for household employers also exist at the state level, in terms of withheld state income taxes and state unemployment taxes.
By not filing the appropriate forms and paying the taxes associated with a household employee’s wages, the worker will be excluded from unemployment benefits and Social Security benefits.
Civil and criminal penalties could result if a household employer fails to meet employment tax obligations. Criminal convictions usually result from mostly intentional, rather than negligent, violations of the domestic employee tax laws. However, household employers who are negligent in failing to comply with tax requirements for employees may be subject to civil penalties as well as interest on unpaid taxes.
Index of Previous Issues of Tax Fax
