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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the nanny tax

Posted in Uncategorized by Pete on March 26, 2012

This will be long and convoluted but its 1:30 and I want to go to bed before my kids wake up at 8, so here goes.  : – )  Did you know that if you have someone babysit in your home, and pay them over $1,800 in the calendar year, you are their employer and you need to give them a w-2, file a w-3 with the Social Security Administration (SSA), and pay the 8.25% of SS, medicare, and fed unemployment taxes?  I didn’t either, until very recently while filling out our 1040.  Here is an email I sent to the SSA on March 19th:

Hi.  My wife and I are teachers and live in remote western Alaska.  In doing my taxes this year, I discovered that for the first time we are subject to the “nanny tax” (IRS schedule H) because we had a “household employee” in 2011.  We had a 19 year old former student babysit for us off and on, in our house.  She did this about 30 times in 2011, usually all day while my wife and I worked (I do short-term, itinerant contract work) and she earned just over $X.  So I just found out that she was technically our employee, and I have to give her a w2 and report the wages to the IRS and SSA (it all started when I got to line 59a on my 1040).  I’m trying to do that.
I did a google search and found some IRS materials which in turn let me know I needed to report the wages to the SSA.  I registered with the SSA Business Services Online and got a username and password.  Then I tried to “add services,” specifically report wages to social security and social security number verification service.  I have a message that “The services listed below are currently pending because your employer’s address cannot be found in SSA records.”  Uh oh.  It says:
If you have not faxed in the required information, please send a fax to (570) 706-7874 and provide the following information:
A letter on your company’s letter head providing the following:
  • A copy of IRS Form SS-4 (or)
  • A copy of IRS Form 941 (or)
  • IRS EIN Notification Letter and a letter on your company letter head including the following:
    • Your Company Name
    • Your Company Address
    • Your Company Telephone Number
    • Your Name
    • Your Social Security Number
    • Your Date of Birth
    • Your User ID (used to log in to BSO)
    • Your Signature
    • Your Printed Name
    • Your Title
    • Authorizing Official’s Name
    • Authorizing Official’s Title
    • Authorizing Official’s Date of Birth
    • Authorizing Official’s Social Security Number
    • Statement certifying that you work for the employer and are authorized to conduct business on behalf of the employer
In my case, there is obviously no company.  Do you want me to send a letter stating that I am authorizing myself to conduct business on behalf of myself?  I’m not entirely joking – if this is what needs to happen please let me know and I’ll do it because I need to file this so I can get my taxes done.  And I’m actually doing the taxes for my babysitter too as a volunteer (I do this for a few different folks in our village every year), so she is waiting on this too because I haven’t gotten her w-2 done yet (I know this was supposed to be done by 1/31 but I didn’t know she was our employee and needed anything from us until March).  The reason the “employer’s address can’t be found in SSA records” is because there are NOT ANY addresses in my village of Kasigluk in SSA records.  No real ones anyway.  We have no streets, no roads, no addresses.  Mail is picked up at the post office, there is no mail delivery.  Proper addresses are name, po box ___, kasigluk, ak 99609 or in some cases replace the 2nd line with “general delivery.”  But when I was filling out the form it said I HAD to put a physical address.  So I put the one that I’ve always put on my taxes even though there is no such thing – 30503 bigpike blvd, kasigluk, ak 99609.
This same issue can be a huge pain for people all over rural AK when dealing with UPS and FedEx in particular.  Not being able to find a “match” for the address in the computer makes people’s heads explode, but I assure you I’m telling the truth.  This has been brought up many times, and here are a couple examples:
If you want to see for yourself, try looking up my village of Kasigluk on google earth.  Find the runway, then go NORTH on the river until you get to another small community, and that would be where I live.  The grey building just to the left of the big blue school, with orange buildings on either side of us.
So I’m sorry this email has gone on so long.  WHAT DO I DO NOW?  I CANNOT FILE THE W2 BECAUSE OF THE BAD ADDRESS.  I CAN’T SEND A LETTER ON COMPANY LETTERHEAD VERIFYING THE ADDRESS BECAUSE THERE IS NO COMPANY AND NO LETTERHEAD.  I can’t send in a paper w-2 because (a) the deadline was the end of Feb and (b) I haven’t figured out how to do it that way anyway (if you want to send me a link that will help me do it that way, thats fine).  I feel very stuck and annoyed at this point.  Hope you can help me out.
Sincerely,
Peter Schneidler
General Delivery
Kasigluk, AK  99609
907-477-2146
ps – ok, here is where I’ll rant.  I guess I’m having trouble understanding why all of this has to be so difficult and confusing.  If a business like amazon.com made it this difficult to buy something they would soon be bankrupt.  I’m very computer and internet savvy, pay most of my bills online, and have always done my own taxes.  But trying to do the right thing and efile a simple w2 for our teenage BABYSITTER was this enormous, labrynthian task.  On my computer I have had the following tabs open for a couple of weeks now:
I at first tried to follow the checklist in the first link above.  It sort of worked until it was time to actually file the w-2 and then I couldn’t figure it out for the life of me.  The third link above has this quote:  “To start creating form(s) W-2/W-3, select the Create/Resume Forms W-2/W-3 Online link under theForms W-2/W-3 Online tab on the EWR Home page to begin working with Forms W-2/W-3 Online application.”  I couldn’t find the EWR home page (naturally not clickable in the quoted text), nor the “form W-2” tab it mentions.  Go to that link and see if YOU can figure it out. What finally opened the door was I stumbled on a “how to” movie clip that I downloaded and shows you how to do it.   It seems like you guys could have a URL like this:
ssa.gov/householdemployees
Or something similar.  It could be the go-to spot for people who need to file 1 or 2 w-2s for things like this.  It could have links to schedule H with the IRS, some FAQ for people like myself who are surprised to learn that they have an employee and that they have certain responsibilities as a consequence, and a list of important dates for us newbies to know when we have to have the various things done.  Seems to me this could happen with about an hour or two of work, mostly cutting and pasting from various existing sources to make a single repository of information.  I recall that the “nanny tax” was famously abused by politicians and other elites in the 80s and it brought down a few political careers.  If so many people are cheating on it, why does the SSA make it so difficult to obey the law and report the wages?

Yeah, that was long.  The best part was the reply I got 15 hours later:

Thank you for contacting the Social Security Administration.

Please fax in the information requested and a representative will contact you within 24-48 hours.

BSO Support

Ha ha.  So, dear reader, what do you think?   Does that mean that yes as I asked above I should fax a letter stating that I am authorizing myself to conduct business on behalf of myself?  I guess I better start working on some snazzy letterhead.

UPDATE – I did place a call to an Anchorage tax preparation place and explained my situation (I unwittingly missed the paper filing deadline and have hit a roadblock with the w2/w3 efile).  The guy knows about village addresses and laughed and suggested that I file by paper anyway and pay whatever the fine is.  He thought it might be like $50 per w2, which of course there is only one.  But the catch (always a catch!) is that the IRS will only accept the pink carbon copy of the w3 form.  I can’t find one online and print it and use it.  He was adamant that if I did that they would trash it without considering it.  Honestly this just cracks me up.  He suggested that I ask around at various businesses and try to find someone who has an extra one of the 5-carbon copy w-3 forms that they don’t need.  HMMMM.  I think I’ll call a tax guy or two in Bethel and see if I can get one mailed to me.  But this annoys me because I’m actually naive enough to think that we should engage and fix the system that is so screwed up so that the proverbial next guy who has this issue doesn’t have to deal with it.  But I’m calculating the odds of me getting through to someone at the SSA who can “fix” it are approximately…zero.  I’m thinking this blog post has a better (not good, but non-zero) chance of effecting change than me sitting on my phone all day, which I guess is partly why I wrote it.

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