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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IRS Publication 926 has a handy list of state unemployment offices around the country that you can contact about your state responsibilities. In addition to unemployment taxes, you may owe workers' compensation or disability insurance. And because those payments are usually due quarterly, you may have already missed deadlines for 2004 and face a late-payment penalty on top of the tax bill.
Amend the sins of the past
But what if you've been operating under the radar (and outside of the law) for some time -- paying a nanny or other household worker in cash and ignoring the tax rules? What should you do now?
"My advice is to come clean," says California labor attorney Robert King, who runs Legally Nanny, in Irvine, Cal. For a one-time $595 fee, his firm files the start-up paperwork and shows clients how to comply with federal and state employment and tax rules. Beyond doing the right thing, King offers another reason for paying the nanny tax: "I've seen people get caught." You don't have to be nominated for a big job, either. King says that household employers get nailed when a former employee applies for unemployment, disability or social security benefits. If you're snared, you're on the hook for back taxes -- your share and the employee's -- plus interest and penalties.
But how do you come clean?
Tom Ochsenschlager, vice-president of the American Institute of Certified Public Accountants, advises filing amended federal tax returns with the appropriate Schedule H's attached. Federal returns are open to change for just three years after the due date, so returns for 2000 and earlier years are now closed. Ochsenschlager doesn't believe taxpayers are obligated to amend returns for closed years, although he says that he once had a client who was being considered for a big federal job who did so. "The IRS cashed the checks," says Ochsenschlager. You also need to contact state officials to see how to clear up your state records.
At the federal level, you'll owe interest (the current rate is 5%) plus a late-payment fee of 0.5% per month on the back taxes. State penalties depend on where you live. King says that California slaps a 10% penalty on late employment taxes, plus interest.
Note that paying your nanny taxes may not cost as much as you fear. If your nanny is taking care of your kids so that you can work, payments (including payroll taxes) can be run through a tax-free reimbursement plan at work, or they can earn you the child-care credit.
--Research: Elizabeth Kountze