Nanny Tax and Payroll Information

Tax and Payroll information, compliments of Breedlove

The Legal Review

Bringing the Law to Life for the Household Employment Industry

April, 2010

______________________________________________________________________

Breedlove & Associates

In an effort to help you strengthen your business practices and steer clear of legal trouble, The Legal Review will share findings from relevant legal cases. We've found that the easiest way to gain a practical understanding of complex tax and labor law is by reviewing real-life situations. These stories will illuminate potential legal landmines for your agency and/or your clients, and more importantly, show you how to avoid them.

Summer Nanny Slip-Up

As the school year begins to wind down, many families begin thinking about a summer nanny. Since these positions generally last for only a few months, some families choose to ignore their household employer payroll and tax obligations - out of a fear of costs or paperwork or both. This case illustrates that these fears are unfounded - especially for families with short-term or part-time nannies.

The Mistake

A family hired a part-time nanny to care for their children during the summer. They agreed to pay the nanny $15 per hour. By the end of the summer, it had amounted to 300 hours or $4,500. Due to the temporary nature of the position, the family decided it would be easier to "just pay the nanny in cash." A misperception about cost also played a role in the decision, as the husband had assumed "that the employer taxes would make the summer nanny prohibitively expensive."

The Law

Household employers who pay an employee more than $1,700 (2010) in a calendar year are required to withhold Social Security and Medicare taxes from the employee's wages. They also have an obligation to match the Social Security and Medicare withheld, and pay federal and state unemployment taxes. It is the employer's responsibility to see that all taxes are remitted to the appropriate tax agencies. These requirements must be met, even for short-term and part-time arrangements.

Families who pay legally have two tax break options available:

Dependent Care Account (also known as "Flexible Spending Account" or "FSA"): Many employers allow employees to set aside up to $5,000 of pre-tax earnings for childcare expenses. Enrolling for this benefit can save families up to $2,300, depending on their tax bracket.
Child or Dependent Care Tax Credit: Families can take advantage of a 20% credit on expenses of up to $3,000 for one dependent, or up to $6,000 for two or more dependents.

These tax breaks offset most of the tax cost for those hiring full-time nannies. For those hiring short-term or part-time nannies, the tax breaks usually outweigh the tax costs by a significant margin. Here's a look at the math for our summer nanny situation if they had paid correctly:

Employee's Gross Wages                           $4,500
Employer's Tax Obligation                             $506
Total Cost before Tax Breaks                                     $5,006
Savings from FSA                                                   <$2,200>
Total Cost after Tax Breaks                                       $2,806

As you can see, in this example, when the family pays in cash, their cost is $4,500. On the other hand, if the family pays legally and capitalizes on the childcare tax breaks, the cost drops down to $2,800 - a savings of $1,700! Plus, there's the added perks of 1) no legal risk, and 2) the nanny gets all the benefits and protections of professional pay (i.e. Social Security, Medicare, unemployment, disability, ability to obtain credit, etc.).

The Mess

At the end of the calendar year, the family requested reimbursement from their Dependent Care Account for the $4,500 in wages paid to their summer nanny. The HR department informed the family that FSA reimbursement required formal paperwork (i.e. paystubs) to demonstrate a qualified childcare expense.

Anxious to sort out their situation prior to the end of the tax year (FSAs have a "use-it-or-lose-it" stipulation), the family contacted Breedlove & Associates for help. We set them up, filed their overdue reports with the state, prepared all necessary year-end documents and then terminated their service with us (we don't require a long-term commitment so families can cost-effectively use our service for any length of time).

Since no taxes were withheld from the employee's wages, the family had to either cover her share of Social Security and Medicare taxes or go back and collect those taxes from their summer nanny. They opted to pay it themselves.

The Outcome

By playing catch up at the end of the year, the family was able to utilize their FSA allocation under the deadline and they were able to minimize their penalties and interest. However, they paid a price for their procrastination. Their actual budget ended up as follows:

Employee's Gross Wages        $4,873 ($4,500 + Employee's Social Security and Medicare)
Employer's Tax Obligation          $543
Penalties & Interest                     $260
Total Cost before Tax Breaks                      $5,676
Savings from FSA                                     <$2,200>
Total Cost after Tax Breaks                        $3,476
Cost If Handled Correctly                            $2,806
Loss Due to Procrastination                                         $670

As you can see, although the family still saved more than $1,000 by paying legally, they threw away another $670 in savings simply because they waited until the end of the year to fulfill their obligations.

How the Whole Thing Could Have Been Avoided

Had the family visited the Employer Budget Calculator on our website or called us, they would have immediately realized that their cost and complexity fears were based on misperceptions rather than reality. Tax breaks more than covered the employer tax costs - especially in a short-term employment situation like this. And a service like ours can handle all the paperwork for a small, tax-deductible fee and no long-term commitment.

If your families want more information about tax breaks for summer nannies, they can visit our website or call us for a complimentary, no-obligation, no-pressure consultation. In about 10 minutes, we can assess their individual situation, explain the law, guide them past all the labor law landmines, help them capitalize on their tax breaks and address any questions or concerns they may have. Whether they join our service or not, they'll be armed with all the budgetary and legal knowledge they need to make informed decisions.

If you have additional questions, please call 888-BREEDLOVE (273-3356)
or visit www.breedlove-online.com. We're here to help our agency partners
provide their candidates and clients with information, tools and resources
that improve the employment relationship, eliminate legal risk for all parties,
and increase the professionalism of the industry.

Breedlove & Associates * 888-BREEDLOVE (273-3356) * www.breedlove-online.com

The Legal Review

Bringing the Law to Life for the Household Employment Industry

December 15, 2009

___________________________________________________________________________________

Breedlove & Associates

Tax Breaks

As families go through the hiring process, many struggle with the dilemma: to be (legal) or not to be (legal)? Even though they know it could be extremely expensive (and potentially career-threatening) to pay "under the table," they consider it because of the almost universal misperception that "doing the right thing" will dramatically increase childcare costs. This edition of The Legal Review will outline the tax breaks available to household employers who choose to be (legal). These tax breaks can offset most - if not all - employer tax costs, thereby rendering the gut-wrenching cost dilemma essentially a moot issue.

The Mistake

A family hired a part-time nanny to care for their two young children. The nanny worked an average of 20 hours per week for an average gross wage of $300 per week. When they discovered that taxes would be about $30 per week (or $1,560 per year), the news of the incremental expense hit them like the proverbial "straw that broke the camel's back." After a lot of anxiety, the family decided to pay the nanny "off the books." They loved the nanny and their kids loved the nanny, but in their minds they had to make a compromise somewhere. As a result, they opted to break the law and live in fear.

The Law

There are two tax break options available to families with dependent care expenses -as long as they pay legally. There are no income restrictions on these tax breaks. The IRS only mandates that 1) both spouses be employed, full-time students or looking for employment and 2) the child(ren) receiving care be under age 13.

Dependent Care Account

A benefit offered by many U.S. employers, which allows a family to set aside $5,000 each year in pre-tax earnings to offset childcare expenses.
Utilizing the full $5,000 can realize savings of $2,100 - $2,300 per year (depending on the family's marginal tax rate).

Child or Dependent Care Tax Credit*

A tax break taken annually on the federal income tax return via Form 2441 (an attachment to the Form 1040).
A family may itemize up to $3,000 in dependent care expenses for one qualifying dependent, or up to $6,000 for two or more qualifying dependents.
A 20% tax credit is applied to these expenses, realizing annual savings of $600 for families with one dependent, or $1,200 for families with two or more dependents.

*Congress is currently considering a bill that would increase the dependent care expense limits for the first time since 1986. With this bill, families may itemize up to $6,000 in expenses for the care of one dependent, or up to $12,000 for two or more dependents. Furthermore, the credit may increase from 20% to 35%.

Important Note: If a family has two or more dependents, they can maximize their tax breaks by taking advantage of both options. Setting aside $5,000 in the Dependent Care Account leaves a family with a remaining $1,000 in expenses that can be applied to the Child or Dependent Care Tax Credit.

The Mess

The family enrolled in their Dependent Care Account at work. At the end of the first month of the nanny's employment, the family submitted the company childcare expense form for reimbursement using their tax-free dollars. The form requires the Federal Employer Identification Number (FEIN) for reimbursement. The family could not provide their FEIN, because they had decided to pay illegally. Thus, they were not entitled to the tax break.

The Outcome

Feeling trapped, the wife confided in the HR manager at her office that they were paying their nanny in cash and, therefore, they had no FEIN. The HR manager knew of several families at the firm that used our service and told her to give us a call.

The wife then called for a phone consultation with one of our tax and labor law experts. She immediately revealed that they had wanted to "do the right thing" but couldn't afford it. We explained that the $1,560 in employer taxes would be more than offset by the roughly $2,200 she would save from her Dependent Care Account. She screamed when she found out that she and her husband would actually come out $640 ahead by paying legally!

She used that savings to hire us and we immediately got them caught up on all payroll and tax obligations. Because our fees are tax deductible, they were able to offload all the paperwork headaches for the entire year and still come out a few dollars ahead. She and her husband were relieved and the nanny was happy to receive all of her benefits.

How the Whole Thing Could Have Been Avoided

This situation had a happy ending because they corrected their mistake early in the relationship. But the stress and anxiety they endured was completely unnecessary. Instead of struggling with a gut-wrenching dilemma based on assumptions, they could have made a quick phone call during the hiring process and received accurate and comprehensive information in a personalized consultation with one of our tax and labor law experts. Armed with good information, to be (legal) or not to be (legal) becomes a much easier question.

Breedlove & Associates * 888-BREEDLOVE (273-3356) * www.breedlove-online.com

The Legal Review

Bringing the Law to Life for the Household Employment Industry

9/29/2009

__________________________________________________________________________________

Breedlove & Associates

Pending Legislative Changes
to the Child and Dependent Care Tax Credit
Understanding the Significant Potential Impact for our Industry

As you may already be aware, the International Nanny Association (INA) has spearheaded an extensive lobbing effort to amend the Child and Dependent Care Tax Credit. The effort has resulted in three bills pending approval in the House and Senate.

This legislation - if passed - will provide a significant lift to the entire care industry because more families will be able to afford quality care. Since we're numbers people, we've dedicated this month's Legal Review to helping everyone understand the potential financial impact of this legislation.

The Current Law

There are two tax breaks designed to help families with child or elder care expenses:

Flexible Spending Account. Offered through most medium and large companies, Flexible Spending Accounts enable participants to pay for up to $5,000 of care expenses per family per year with pre-tax dollars. Depending on the family's marginal tax rate, this tax break saves families $2,100 - $2,300 per year.

Child and Dependent Care Tax Credit (CDCTC). Families can receive a 20% tax credit on up to $3,000 of dependent care expenses if they have 1 dependent or up to $6,000 if they have 2 or more dependents. Using Form 2441 with their federal income tax return, families with one child save up to $600 per year while families with two or more children save up to $1,200 per year.

While the cost of care has risen steadily over the years, these tax breaks have remained static for more than a decade. Each year, fewer and fewer families can afford quality care. It's time for change.

The Proposed Legislation

The new bill under consideration in Congress is designed to better reflect today's cost of quality care. Although the Flexible Spending Account would not be altered, the CDCTC would change radically. The proposed legislation would double the expense limits (to $6,000 of dependent care expenses if a family has 1 dependent and $12,000 if the family has 2 or more dependents). Additionally, the tax credit percentage would increase from 20% to 35%.

The New Math

The proposed legislation would save your clients a considerable amount of money each and every year they employ a caregiver. Here's a comparison of the current and proposed tax breaks using the Child and Dependent Care Tax Credit:

Families with One Child
Current Tax Breaks (20% of $3,000)       =      $600
Proposed Tax Breaks (35% of $6,000)    =   $2,100

Families with Two or More Children
Current Tax Breaks (20% of $6,000)      =    $1,200
Proposed Tax Breaks (35% of $12,000) =    $4,200

Important Note: If a family has 2 or more children AND access to a Flexible Spending Account, they'll be able to capitalize on both tax breaks. Using the $5,000 Flexible Spending Account through their employer, the families will save $2,100 - $2,300 from that tax break PLUS they'll have an additional $7,000 in expenses that can be itemized on Form 2441 under the CDCTC. Combined, the two tax breaks would yield a savings of $4,550 - $4,750 each and every year!

As you can see, the proposed legislation would provide tremendous financial relief for families - making quality in-home childcare more affordable to more families and potentially creating a significant increase in demand for the entire industry.

How We Can All Help

In order to improve the odds of these bills becoming law, we encourage you to take a moment to send an empassioned plea to your Senators and your Representative in the House. We also encourage you to share this legislative news with your database of families so they too can voice their opinion.

To write your congressmen: Most congressmen have an email contact from on their website which can be found by googling Your State + Senators (i.e. Texas Senators) and US House of Representatives + Your City (i.e. US House of Representatives Austin, TX).

In our current legislative environment, the squeaky wheel gets the grease. So, let's make some noise. Five minutes could make a huge difference for our industry.

Breedlove & Associates * 888-BREEDLOVE (273-3356) * www.breedlove-online.com

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