My wife and I are planning to hire a nanny to take care of my three years old daughter. I am not sure about the tax consequences.
a) Do I required to give her a W2 or 1099? What are the advantages of giving 1099 compared to W2? b) Can I claim any deductions or tax credit for money paid to the nanny?
If someone can clarify what kind of tax I need to pay to IRA or social security. What kinf of forms I need.
Thanks.
If this work is done at the Nanny's house, then all you are required to do is have the nanny fill out a Form W-9 and give it to you and at the end of the year issue a Form 1099-Misc.
But if the Nanny comes to your home, she becomes your household employee.
The IRS has issued a nice publication
the household employee laws. Part of that is filing for am employee ID number, obtaining state-approved unemployment insurance, paying for workers compensatuion, and filing Form 1040 Schedule H. See also the instruictions for IRS Form 1040 Schedule H.
If both of you are working or looking for work, you can take the dependent care tax credit. CA also has a dependent care credit.
Please confirm: The person hiring the nanny will not be able to take a deduction for wages paid, their portion of FICA taxes, unemployment insurance, and worker's compensation insurance.
Confirmed.
The amount allowed as child tax care is the income reported by the child care provider.
As usual, there are a lot more details than that. So I'll mention a few key ones here:
It's not enough to be looking for work. Each spouse still has to have actual earned income for the year (or one of them can be a full-time student or totally disabled and claim "fake" earned income for just those months as a student/disablee).
Also, the care provided needs to be directly in connection with the work/job search/student status. Costs for care to allow the parents to go out for dinner or on a vacation do not count, although presumably there will be enough qualified expenses to get the maximum credit with a near full-time nanny.
Speaking of which, this is one of the few federal credits that does not phase out completely for higher-income taxpayers.
Now, a new question comes to mind: can someone hiring a nanny as a household employee still use an employer dependent care reimbursement account (W-2 Box 10) to help cover the expenses?
-Mark Bole
To get picky, wouldn't *all* the expenses, including payroll taxes/UI/workers comp insurance, be allowed as qualified expenses? (not just the wage income reported by the employee)?
In reality, the maximum allowed for the credit will probably be far exceeded even without these extra expenses.
-Mark Bole
You have to furnish the name/ein of the child care provider.
I would think (bad mistake) the amount reported by you would have to appear as income on the recipient's tax return.
Okay, confirmed. Unless the the sum of the above is used for the child care credit.
Yes, one would think so and in a perfect IRS matching program any mismatch would surface. But I've yet to encounter any exception that IRS took to such a mismatch.
ChEAr$, Harlan Lunsford, EA n LA
I read through the replies. One important note; the federal system and state can differ. For example, IIRC, the Federal taxes were submitted as part of my own tax return, i.e. I squared away with the Feds in April. The State taxes had to be paid to the state quarterly in the exact amount I withheld.
The dollars didn't bother me, my objection was one of form. The IRS would find much higher compliance if they offered a simple Nanny Tax package, one that was published separate from other employer documents. I found myself answering questions as though I were an employer of multiple people, right down to paying into the unemployment system, etc. For this issue (of a single household employee) it would also be great if the state and feds matched up their process.
Good luck. /Joe
Help is on the way. Washington hears you. Just hang on a little while.
In my latter years at the IRS I became involved with the Simplified Tax and Wage Reporting System (STAWRS) project, a joint effort of the states, IRS, Social Security, and Labor to make life easier for all employers. I think that project, or a successor, sends out periodic encouraging newsletters. Of course, I retired 14 years ago, but I'm sure any day now....
Phil Marti Clarksburg, MD
Hurry, Phil and tell me; should I hold my breath?
OK. Nannay will be coming to our home so I need to give her a W2 (not
1099)Can anyone confirm?
The process should be (please correct me)
She is a permenanat resident so I think I will be OK with I-9.
I need to get a tax payer identification number from IRS, withold FICA and match my part of FICA and also pay federal and state unemloyment taxes.
Do I need to deduct any income tax..? I doubt she will have any taxable income at the year end?
How often do I need to send check to social security (once every three months)..?
At the year end I will get $600 tax credit ($3000 *0.20 based on my income) . This is bad... IRS should increse amount you can deduct for child care from $3000 per child to something more realistic (OK you know it cost much more than $3000/year for child care per year)
Does amount paid as FICA tax deductible..?
That's correct. Make sure you get her SSN at the beginning.
Not a tax law issue, but the last time I looked at an I-9 it seemed to be pretty straightforward about what documents you must examine.
Yes to the ID number. Each of these taxes has its own income floor, but assuming that you're liable for all, yes, you have to pay all. Some household employers don't withhold the employee's share of SS/ Medicare and pay the full tax themselves. In that case the employee's share is additional income (box 1 of the W-2) for income tax, but not for SS/Medicare (boxes 3 and 5).
Income tax withholding is voluntary on the part of both employer and employee. Unless both want it, you don't have to do it.
The only thing you send to SSA is the W-2. You will report and pay all your Federal taxes on Schedule H of your 1040. Check to see whether you'll have to make estimated tax payments or boost your withholding--Publication 505.
IRS doesn't make the rules. That's one for a letter to your members of Congress.
No.
Phil Marti Clarksburg, MD
Really? Could I claim a million exemptions at work and then just make quarterly estimated payments, thereby earning additional interest?
Why should the IRS subsidize your child care expenses fully?
The question was about a nanny. Federal income tax withholding is optional for household employees.
Of course, the IRS doesn't subsidize anything, the rest of the taxpayers do.
The question many non-separated parents face is, should one parent stay home and provide tax-free (and wage-free) labor for child care, or should both work and see a non-trivial amount of the 2nd spouse's earnings go to others for child care. There is no right answer, although tax law provides a partial offset for the latter choice.
For those with cooperative extended families, a grandparent or aunt/uncle might also provide "free" child care.
-Mark Bole
[long list of things]
There are services that will do all those things for you. They do this involume for companies, so should be able to do it easily. I don't now what the charge would be for an individual part-time employee, but my understanding is that it would be reasonable.
Several points:
Another thing I neglected to point out in my last message is this... I think I'm a pretty smart guy. I do my own taxes every year, and (not withstanding my recent bloopers about the AMT in this newsgroup :-) I think I understand how to navigate red tape pretty well. I think the facts that I'm smart and experienced with red tape are the *only* reasons why I'm able to successfully navigate the morass of red tape surrounding hiring a domestic employee. I'm pretty certain that most people simply won't be able to get it right. This is not an acceptable situation.
Following the law does benefit the nanny too. For every $1090 of income s/he'll get a social security retirement and disability credit, up to four a year. Young people prefer to pocket the tax money. But when they are older they'll see this sacrifice as useful.
Maybe you can drop the kids off a daycare center. I wonder if nightcare centers exist, as you said the nanny comes 2 evenings a week.
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