Out There

Nanny Tax, part 2 (the Schneidler strikes back!)

Posted in Uncategorized by Pete on April 13, 2012

Or “Is it too late to vote for Herman Cain and the 9-9-9 tax plan?”  Can I order the plan, and hold the Cain?

Update time!

Following up on my previous post, I wanted to write about my experience with the so-called “nanny tax.”  This refers to the variety of taxes you pay as an employer for the “household employees” that you employ.  In my case as I mentioned before I had no idea that we were “employers” in the eyes of the IRS and SSA (social security administration).  I was doing our taxes and going line by line through the 1040 when I reached line 59a – “Household employment taxes from schedule H.”

The 1040 instructions pointed me to schedule H, which pointed me to the schedule H instructions, which pointed me to IRS Publication 926.  Ah, nice light bedtime reading material.  Anyway this doc helped me determine that yes, I mostly likely was an employer because it specifically mentions babysitters working in your home as an example of an employee.  The key (albeit somewhat cryptic) sentence is this:

A household worker is your employee if you can control not only what work is done, but how it is done.

Clear as mud, right?  I won’t go into the myriad of further details, but suffice to say if you have someone babysitting in your home it is almost always going to be looked at as an employer/employee relationship.  Trust me.  Our situation was we had a 19 or 20 year-old former student babysit for us about 32 times in 2011, earning just over $3,000.  She was free to decide each time whether to work or not.  We would call her the week before, or the night before, and ask if she wanted to work, and she’d tell us yes or not.  We also used about a half dozen other babysitters during the year, though 2 or 3 got aobut 95% of the jobs, and this former student is the only one who babysat at our home.  I thought we might have a case for her not being an employee based on the fact that she had free power to accept or reject every time we called her.  I couldn’t FIRE her for saying no thanks when I called because she wasn’t my employee, right?  I called 2 tax prep people, an accountant friend, 2 CPA tax pros in Anchorage, and 2 firms that do nothing but “nanny taxes.”  It became clear that legally and technically and ethically they were my employees and I needed to pay the tax.  It also became clear that the vast majority of folks in my situation don’t pay it, either out of ignorance or their good intentions are bludgeoned into submission by the horrors of publication 926, schedule H, and preparing/submitting a w2 and w3.  And apparently the vast majority of the cheaters never get caught.  More than one of the “experts” I spoke with said I didn’t really HAVE to pay it…  My accountant friend flat out said I was nuts to pay it.  I guess he doesn’t know me that well — I am nuts!

I will post a bunch of the links I found that were helpful, but most of them were LONG and fairly general.  So here are the key things to know.

1. If  you stay under certain minimums, you are free and clear.  I’ll lay out those minimums below.  You are also free and clear if the person is below 18 at any time during that tax year, or if they are your spouse or parent, or if they are your child under age 21.

2.  You have to pay the federal unemployment tax (FUCA) of 0.6% of the first $7,000 of cash wages if you pay over $1,000 in any single quarter of the year (jan 1 to March 31 for example).  This isn’t per person, it is the sum of your employees.  So if you pay 10 different babysitters $100 each in a single quarter, you owe the FUCA tax, which fortunately is small and is a single line item on IRS schedule H.

3.  You, the employer, have to send in the medicare and social security taxes if you pay more than $1,800 to any one employee in 2012.  This is also handled via schedule H.  These taxes are usually split between the employer and the employee.  The employer typically withholds the employee portions (1.45% for medicare and currently 4.2% for social security) from each paycheck.  Then at tax time the employer sends that money he has been withholding from the employee, WITH another 1.45% from your own pocket for medicare tax, and currently 6.2% for social security taxes.  If you didn’t withhold any of these from your employee’s paychecks, then you have to cover the whole amount due (employer portion + employee portion) out of your own pocket.  This is where we unwittingly found ourselves.

4.  You have to get an employer identification number (EIN).  I can’t remember now if I got this from the IRS or SSA website, but it took like less than 10 minutes.  This is not the same thing as your social security number.

5.  You have to fill out and submit a w2 for each household employee, and a single w3 to the SSA.  A w3 is a single form that looks like a w2 but it is where a company puts the totals from all of their employee w2s into a single document.  If you have one employee, the w3 numbers are identical to the w2 numbers but you still have to fill them both out.  You have to give a w-2 to your employees by Jan 31.  You have to file the paper copies (w2 and w3) with the SSA by the end of Feb, or if you choose to efile them (unless you live in bush Alaska!  ha ha!) you have until the end of March.   OH, and I almost forgot, you can’t just print off a w3 form to use.  The IRS has them online like their other forms, but they say “For informational purposes only” and state that you cannot print them and actually, you know, USE them.  I only got one because some very, very kind and professional people at nannytaxprep.com read my blog post about the w2/w3 drama with the SSA and had pity on me and emailed me an IRS-approved 2011 form (I had already asked at a half a dozen businesses in Bethel, the Kasigluk store, but no dice).  If I had the money I would happily pay those fine folks the $500 or so per year to take care of all the nanny tax stuff for me.  I also saw that you can order w2s and a single w3 from these folks for about $15:  http://www.essentia-soft.com/taxforms/

6.  You have to pay state unemployment taxes.  In my case this meant me going on to the state website and poking around, then calling someone and I had to set up a profile on the state website, then set myself up as an employer via a short application.  Then I got an email with my account number with the state department of labor’s employment security tax division.  Using this, and with the help of another phone call or two, I found my way to a state webpage where I filed my quarterly wage reports all the way back to first quarter 2011.  I had to pay some penalty interest but they agreed to waive the late fees since I had no clue until now that I was an employer.  The total damage for 2011 was just over $100 based on wages of just over $3,000 so not too bad.  The official rate is 2.92% paid by employer, and 0.66% paid by employee.  Again, because I hadn’t withheld anything, I as the employer was on the hook for the entire 3.58%.  I don’t know if there are minimums for the state unemployment taxes.  These must be filed and paid going forward on a quarterly basis or you will have to pay the late fees.  You can pay online via EFT from your bank account (no credit cards).

7.  You have to fill out schedule H and enter the taxes due on 1040 line 59a (see we’ve come full circle!).  There is a question on schedule H that asks if you have paid your state unemployment taxes for the tax year or not.  I can’t remember the details but you don’t want to answer “no” to this question.  So before I could finish schedule H I got the state unemployment stuff taken care of.  Once you have everything else above done, schedule H is actually like a 10 minute, straightforward form.

In retrospect this doesn’t really seem all THAT bad to me.  But it was.  In particular the w2/w3 thing was a killer for me, as detailed in the preceding blog entry.  And though I have a background in accounting, it wasn’t payroll and I’d never understood how the withholdings worked (thought perhaps the businesses were actually sending in the taxes every couple of weeks, from each paycheck, to the SSA, medicare, IRS, etc).  And the different rates of the different taxes, dealing with so many different bureaucracies, all to pay something that 90% of people don’t pay…it was frustrating and overwhelming.  If they want people to pay it they need to overhaul and simplify the process.

Oh, I almost forgot.  Our total nanny taxes on line 59a came out to $465.  Add in the $103 or so in state unemployment taxes for 2011 and you get $568, or just over 17% of what we paid our single household employee in 2011.  That sitter ended up finding a regular job, and we have a new sitter now.  But I’m not going to withhold anything from her paychecks.  Between the SS, medicare, FUCA, and state unemployment it’s way too complicated.  Instead we’re cutting her hourly rate enough to cover her contributions.  I explained this to her and she was ok with it, and this way when we go to pay her we don’t have to spend another 10 minutes crunching all the numbers.

OK, here are a ton more links related to the nanny tax that I looked through to help me understand.  I’m pasting them in this way because wordpress is having a problem inserting links tonight.  All part of a plot to get me to give up and go to bed at a reasonable hour!  HA!  I won’t see the light so easily.

http://www.nytimes.com/2009/01/24/your-money/taxes/24money.html?_r=2

http://www.irs.gov/instructions/i1040sh/ar01.html#d0e21

http://www.irs.gov/taxtopics/tc756.html

http://socialsecurity.gov/employer/

The next 2 are kind of similar but good:

http://www.cpalaska.com/le-nannytax.php

http://www.mcdonaldhopkins.com/alerts/alert.aspx?id=wm3GqHii6Uek3NiDFigRWg

Here is an example of one of the companies that for about $500 per year will make ALL of this “go away.”  I think if you have the bucks to pay for employees in your home like cooks or live-in maids, then paying these dudes would be a nooooo brainer.  They are the ones who helped me and sent me the w3 when I was up a creek.  Laura and Judy are who I spoke with via email and phone.  Friendly, knowledgeable, and professional:  http://www.nannytaxprep.com/

So I’m calling it right now.  Next year?  Turbo tax.  Uncle!!!  I’ll pay the bloody $50 or whatever it costs.  Mercy!!  I don’t truly want one of those flat taxes that basically screws the poor.  But the system is indeed ridiculously ripe for reform because a reasonable, educated person will soon be literally unable to independently do their own taxes.  I had some self employment income this year from some freelance speech pathology work.  i was paid with 1099s.  I had some expenses that I could deduct from my earnings.  I also bought a couple things to use in that line of work, like an ipad and a very expensive augmentative communication app.  I had to delve into the world of how to depreciate these assets, and after a few hours with the bottomless, devious and quietly maniacal IRS form 4562 I was ready to pay anything to make it stop!  And I actually kind of like taxes!  I have a background in accounting and math is easy for me.  So I’m saying if regular people can’t figure it out, no wonder there is this huge disconnect.  Apathy, antipathy, and cheaters galore.  At what point does it cave in on itself?  On that apocalyptic note I’m out of here.  To bed and dreamless sleep and not another thought on taxes, and tomorrow home to my family after a week of working on the road.  Hooray!!

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