Time to Come Clean
Is the latest high-profile nanny case tugging at your conscience?
By Kevin McCormally, Editorial Director
From Kiplinger's Personal Finance magazine, March 2005
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Bernard Kerik seemed straight out of central casting when he was nominated to take over the Department of Homeland Security. Until, that is, we learned that President Bush's first choice to replace Secretary Tom Ridge couldn't run his own household legally. Instead of taking on terrorists, tough-guy Kerik was felled by the Mary Poppins tax.
His case threw the nanny tax -- the collection of federal and state rules that apply to household employers -- back into the headlines, and surely sprinkled a bit of anxiety among the tens, or maybe hundreds, of thousands of Americans who share Kerik's dirty little secret. No one knows for sure how many people ought to be paying social security, medicare and unemployment taxes for their child- or elder-care providers, housekeepers and other household employees; one estimate puts the number at two million. But fewer than 240,000 taxpayers filed the nanny-tax form with their 2002 tax returns (the latest year for which figures are available). Hmmm.
If you had a household employee in 2004, you still have time to comply with federal rules. Schedule H, on which you calculate your federal nanny tax, goes with your income-tax return, so the deadline is April 15. (More later on what to do if you've been living on the wrong side of the law for years.)
Who owes the tax?
When you hire someone to work around the house, you may or may not be considered an employer. The key is whether you control what the worker does. A nanny who cares for a child in your home is almost always your employee. But if she cares for your child in her home, she's generally not. If you hire your help through a nanny or lawn service, the worker is probably an employee of the service. That means it has the tax headaches.
If you are the employer, though, and you paid $1,400 or more in wages, it falls on your shoulders to pay social security, medicare and unemployment taxes for your worker. Get IRS Publication 926 (Household Employer's Tax Guide) for the details. Basically, the social security and medicare taxes add up to 15.3% of pay, split evenly between employer and employee. If you didn't withhold your nanny's share from her wages and pay the full pop now, covering the worker's share is considered extra income to her. That, of course, pushes up the wages on which these taxes are due. (Hey, we didn't say this was easy.) You need to give your nanny a W-2 form reporting her salary (it was due January 31) and send a copy to the Social Security Administration (due February 28).
If you paid your nanny $1,000 or more in any calendar quarter of 2004 or 2003, you also owe federal unemployment tax. It's ostensibly 6.2% of the first $7,000 of wages, but you'll get a credit for paying state unemployment taxes that knocks the federal rate down to 0.8%. So it really tops out at $56. (If you're not square with your state, pay that tax before you file with the feds so that you get the benefit of the credit.) You'll need a federal-employer ID number to complete your Schedule H. Get it at the IRS Web site or by calling 800-829-4933.
