Recently I read an excellent article by Sue Shellenbarger, Wall Street Journal columnist, reminding us why it is important to remember the nanny tax:
"The slumping economy means more nannies are likely to be laid off and then file for unemployment benefits, drawing the scrutiny of tax regulators, attorneys say. Also, avoiding the taxes leaves nannies devoid of a safety net, including Medicare and Social Security benefits, in an era when they may need it more than ever. . .
People who pay household workers more than $1,600 a year are required to file onerous paperwork to cover Social Security and Medicare taxes of 7.65% of gross pay; federal unemployment insurance of 0.8%; state unemployment insurance, usually of 2% to 4%, and other state and local taxes. The employee’s share is another 7.65% for Social Security and Medicare, plus any state and local taxes. Many parents spend $30 to $70 a month to have a payroll service handle all the red tape."
There can be a huge cost for overlooking these taxes. Parents may find themselves hit with the nanny’s and the employer’s share of payroll taxes, plus interest and penalties, according to Shellenbarger. She adds that complying with tax laws enables parents to set aside up to $5,000 in pre-tax income for child-care expenses and notes that it also extends to the nanny Social Security and Medicare benefits.
For more information see the IRS Household Employer's Tax Guide.
Thanks to Sue for continuing to raise the consciousness on issues important to workers! See Sue Shellenbarger's book, The Breaking Point: How Female Midlife Crisis is Transforming Today's Women.