Don't forget your 'nanny taxes'
Hiring a neighbor teen to watch your kids this summer? Budget an additional 10% for federal and state taxes -- and that goes for in-home care the rest of the year, too.
Planning to pay a local teen or a neighbor lady to watch your kids this summer? Make sure you're doing it legally. If you pay more than $1,800 in cash per calendar year, you're required to pay federal (and maybe state) wage taxes.
The bad news: You'll need to do an actual payroll, and the tax payments will add about 10% to your total child care costs.
The good news: Tax breaks may cover that amount, and if you don't want to do the paperwork you can hire it out.
Paying your child care provider on the books means you can use your Dependent Care Flexible Spending Account, i.e., pay with pretax income. If your workplace doesn't offer an FSA, you can take the child care credit on your 2013 taxes.
Depending on your tax rate, you'll save $600 to as much as $2,400 per year. That should take care of some or all of the amount you pay in employer taxes, but only if you "fulfill your 'nanny tax' obligations," says Stephanie Breedlove of Care.com HomePay.
The so-called nanny tax actually applies to any household help, including that once-a-week cleaning person or the woman who cares for an elderly parent in your home. That is, if they are actually employed by you vs. being independent contractors.
"It doesn't matter if the worker is full time or part time or whether you pay on an hourly, daily or weekly basis or by the job. If you are in charge of job particulars, the IRS deems you in control and you must pay the appropriate taxes," says Kay Bell, who blogs at Don't Mess With Taxes.
The paper trail
Bell breaks down that employee/contractor distinction somewhat in this article on Bankrate.com, and recommends an IRS publication called the "Employer's Supplemental Tax Guide" as a resource to defining employees vs. contractors.
She also explains how to figure and file the FICA (Social Security and Medicare) and federal unemployment taxes. Note: You may also have to pay into state unemployment and workers' compensation pools.
Creating an actual payroll and filling out forms like the Transmittal of Wage and Tax Statements can seem daunting. That's why some choose to hire a service like Care.com Home Pay, SurePayroll or The Nanny Tax Company.
Expect to pay anywhere from $500 to $750 per year. As with other outsourced chores like housecleaning and yard work, the relief from aggravation would certainly be worth the extra $9.60 to $14.42 per week. It's your call.
What if you don't pay?
If you get caught, you'll owe back taxes plus interest. And if 20 years from now your former nanny applies for government benefits that you neglected to pay into, you're looking at a lot of backdated interest.
As noted above, paying household help on the books can be a tax advantage to you, the employer. It's also a boon to the workers themselves if they need to file for unemployment or workers' comp, and ultimately when they retire.
A verifiable income source will also help when a worker wants to rent an apartment, get an auto loan or apply for a credit card, Breedlove notes.
Certainly the federal government hopes you'll do the right thing. Child care is a big part of the "shadow economy" of jobs done for cash. These off-the-books gigs meant an estimated loss of $500 billion in unpaid taxes in 2012, according to this MSN Money article.
Readers: Do you pay the nanny tax?
More on MSN Money:
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