There are blurred lines as “nanny” duties vary wildly from family to family. So let’s scrap that word for now and focus on what we really are as human beings: Taxpayers. The question becomes, is “worker” a contractor or an employee?” It doesn’t matter what you call your on-residence “worker”, it matters what the state calls them.
The lines between a “worker” being classified as a contractor or an employee is the same in the nanny world as it is in any other business world. You can tell an employee what to do, when to do it, and how to do it. Tools are provided to employees and their schedules are set by their employer. Contractors, however, agree to perform a specific job with set parameters, and the execution – how the work is completed- is up to them.
In recent years the lines were blurry. Time spent at the residence was the determining factor whether a worker was a contractor or employee. Now, with new IRS laws in 2022, even a weekly night out with your squeeze could leave you filling out tax forms on the weekend. The new law determines that if you pay just $2,400 to an on-residence worker, except if it is a family member or other child under 18, they are an employee and you and the worker are required to pay the 7.65% Social Security and Medicare taxes.
These laws come in the wake of the 1099-K form- a new tax document for filing online payments from platforms like CashApp or Venmo. The IRS reportedly missed around $2 TRILLION worth of taxable transactions in 2017 from the “shadow economy” (i.e. unreported taxable transactions). Previously propped up by cash retail establishments, the shadow economy has new support in these peer-to-peer payment apps, and Big Brother is watching. It’s important to know that if you use these payment apps and send $2,400 to your household worker, the corporations are required to send you the 1099-K form. The online under-the-table back door – is closed.
Some quick math:
$2,400 / $15/hr wage = 160hrs
160hrs / 52 weeks = 3.07hr/week.
This means if you hire a part-time caregiver, who is 18 years or older, and pay them $15 an hour for just 3 hours a week, you will still be required to pay the tax. And that still isn’t all the taxes you may owe. If you hit $1,000 worth of payments in a single quarter to one worker, you will also be obligated to pay the 6% unemployment tax.
It’s clear that, at least in the IRS’s eyes, a nanny is an employee. If you still aren’t sure, either the family or the nanny can submit the SS-8 Tax form. This form is used by either party when there is a dispute over worker classification. It should be noted that the IRS almost always designates the worker as an employee. This is mainly used as a recourse for household workers who have been wrongly paid as contractors.
Now what?
GREAT question- but you probably know the answer. The good news is that the waters are more clear. The bad news is that you now have a new administrative job, pro-bono – or really, no-bono. It is estimated that it takes 60 hours a year to keep up with the tax filings required to hire a nanny. Here is a good link that details what that entails. SPOILER ALERT, it doesn’t look fun.
Of course, it is easy to imagine there are plenty of families that will continue with physical cash payments under the table, but that comes with risks. Risk of audit, back taxes on unreported transactions, and hefty fines (not to mention your peace of mind) are all great reasons to keep it on the books.
It should be noted that both families and nannies attempt to sneak by the tax guy, and there are risks for the nanny as well. Failing to report income can result in back taxes and fines that can be crippling. Reporting transactions helps nannies pay less in taxes, receive benefits, and build credit and a documented employment history. This is crucial for making large purchases, applying for leases, and finding new employment down the road.
Luckily there is an alternative to the do-it-yourself method. A payroll company specifically designed for household workers. This provides a personalized, one-on-one consult to ensure the specific needs of your family and your nanny are met. The process is simple and painless and allows you to spend more time with your children rather than learning how to use QuickBooks.
Although we all want to keep more money in our pockets, taxes are a part of life. We live in a society, and there is a cost. Attempting to avoid the IRS is never a good call, and when you get caught, it ends up costing you significantly more in the long run.
When in doubt, employ it out. You and your nanny will thank you for it.
DISCLAIMER: This material has been prepared for informational purposes only, and is not
intended to provide, and should not be relied on for, tax, legal or accounting advice. You should
consult your own tax, legal and accounting advisors before engaging in any transaction.
