The summer months are right around the corner and many families are already planning their vacation schedule. For those who take their nanny along to watch the kids, this edition of The Legal Review addresses a common labor law mistake.

The Situation

The Kellogg family hired a nanny through a local placement agency to care for their three sons. The family needed someone who would be able to travel with them for at least two vacations during the summer. The agency was able to set the Kelloggs up with an ideal nanny who was eager to accept the position, in part because she had never been out of the state before and liked the idea of traveling to new places. The agency also recommended the family call Breedlove & Associates because traveling with a nanny can be tricky for families unfamiliar with labor law. The Kelloggs politely declined as Mr. Kellogg had worked in financial services his whole life and felt comfortable handling the nanny’s payroll and taxes.

The Mistake

The first family vacation was a week-long trip to Disney World. The nanny was excited to go and assumed she would have some free time of her own. To her surprise, she worked much more than normal – instead of her normal 40 hour workweek, she worked 60 hours in Orlando. However, she didn’t complain because most of her days were spent riding rides and playing games with the kids.

Upon returning from the trip, the nanny was exhausted. When she received her paycheck, she was surprised to find it was $300 less than her normal pay. When she read over her paystub, she noticed a $300 deduction for airfare. The nanny did not think this was correct, but before bringing it to Mr. Kellogg’s attention, she contacted her placement agency who referred her to Breedlove & Associates.

The Law

When accompanying an employer on a trip – whether a vacation or a business trip – an employee must be compensated for all hours worked during the trip, including the time spent traveling to the destination. If the employee’s working time exceeds 40 hours in a 7-day period, the employer must pay the employee for the overtime hours at the time-and-a-half rate. In addition to the regular and overtime pay, the employer is responsible for the employee’s traveling expenses, including airfare and hotel accommodations. These expenses are covered by the employer because the employee would not have incurred these expenses on her own.

A traveling employee does not need to be compensated during her “free time,” which is defined as time when she is not responsible for her charges and she has complete freedom to go and do whatever she pleases.

The Mess

A Breedlove & Associates consultant explained to the nanny that Mr. Kellogg had not handled her compensation for the trip correctly, but that this was a common mistake for new household employers. The consultant informed the nanny that she should have been paid for all hours worked and that Mr. Kellogg should not have deducted the expense of the flight from her paycheck.

The nanny presented this information to the Kelloggs and they were surprised and embarrassed to find out they had underpaid her. They apologized and explained to the nanny that it was never their intention to swindle her out of any additional money owed to her. Mr. Kellogg prided himself on paying the nanny “on the books,” but admitted he was not an expert in employment law.

The Outcome

Mr. Kellogg contacted Breedlove & Associates on the advice of the nanny to figure out how much he needed to pay her. We helped him calculate the additional compensation owed to the nanny for the trip and explained more about household labor law so he would be prepared for the next family vacation. The Kelloggs made a catch-up payment to the nanny right away and ultimately decided to sign up for our service so they would never risk making a similar mistake again.

How the Whole Thing Could Have Been Avoided

If the Kelloggs had called Breedlove & Associates from the beginning – as their agency recommended – we could have helped save them the embarrassment of underpaying their nanny. Luckily the employment relationship between the Kelloggs and their nanny did not suffer from this incident, but their situation illustrates how easy it is to make a mistake with payroll or labor law.

That’s why Breedlove & Associates prides itself on staying on top of any changes in the law that might affect household employers. And why we are willing to provide each and every family with a free phone consultation. It’s easier and less expensive to handle everything correctly from the beginning and we’re always here to help!

Today is Earth Day – a great reminder that we all need to continually look for ways to be more eco-friendly in our day-to-day activities. Here at Breedlove & Associates, we decided several years ago to transform the way we deliver our service in order to radically reduce our use of paper and postage.

It’s working. Through electronic tax filings, e-delivery of paystubs and our online filing cabinet, we’re proud to say that only 1% of our clients receive paper paystubs and tax returns and our printing and postage usage has dropped to less than 10% of what it used to be.

We’re not stopping there. Employees paid through Breedlove can now opt to receive Form W-2 online (instead of by snail mail).  This effort will get us very close to paperless – so we can celebrate Earth Day every day.

Tomorrow, April 20, is National Nanny Training Day and it’s an important day for caregivers who want to get the most out of their job. Between 1,500 and 2,000 professionals will participate in 38 events across 18 states hosted by local agencies. We’re very excited to see so many nannies committed to improving their profession because their efforts will undoubtedly trickle down to positively benefit the families they work for and the children they care for.

So kudos to all the nannies who will attend National Nanny Training Day events and to the agencies that will host! You’re all doing your part to increase the professionalism of the childcare industry and, most importantly, making a difference in the lives of so many kids.

Paying taxes tends to invoke negative feelings for most people. Fortunately for household employers, there’s a silver lining on your gray tax cloud – tax breaks. As long as you and your spouse are working or are a full-time student and have at least one child under 13, you’re in a great position to make back most, if not all, of your nanny taxes. Here are two ways you can save:

1)  Dependent Care Flexible Spending Account. Many companies offer their employees the option to set aside up to $5,000 of their pre-tax earnings into a Dependent Care Account to pay for childcare expenses. This means there is no federal or state income tax, Social Security tax or Medicare tax on $5,000 of either you or your spouse’s income. Depending on your state and your tax bracket, this deduction will save you anywhere from $2,000 to $2,300 per year.

2)  Child Care Tax Credit. If you don’t have access to a Dependent Care Account, you can claim the Tax Credit for Child or Dependent Care (IRS Form 2441) on your federal income tax return at year end. If you have one child, you can save up to $600 per year (20% on up to $3,000 in childcare expenses).  If you have two or more children, your savings will be up to $1,200 per year (20% on up to $6,000 in childcare expenses).

Great News! If you have two or more children under the age of 13, you can use a combination of these two tax breaks in order to achieve a maximum of $2,500 in tax savings.

For many families, the tax breaks will offset a large portion of the employer tax costs.  This is especially true for those employing someone on a part-time, seasonal or NannyShare basis. For a more fine-tuned estimate of how much your family can save from tax breaks, use the free Nanny Tax Calculator at www.breedlove.com.

Hiring a full-time, experienced nanny to provide exceptional care for your children can be a daunting expense, especially for first-time household employers. Not only do you have to budget for the nanny’s wages, but also your employer taxes (Social Security, Medicare, state unemployment, etc.). But if you partner up with another family in a similar situation, you can enter into a nanny-share and split the costs.

NannyShares are becoming more popular, but both families need to be on-board with their household employer requirements for it to work professionally and legally. Both families need to document paying the nanny and be set up with the IRS and state as household employers.

The good news is, once the families have their NannyShare set up, they can both take advantage of tax breaks to offset their household employer costs – and many even come out ahead. To check out your savings and learn more about childcare tax breaks, visit our free nanny tax calculator.

If you’re a household employer and paid your employee at least $1,800 last year, you have 2012 nanny tax deadlines coming up shortly. Here’s a quick breakdown of what should be on your radar:

January 31

- Send in your 2012 fourth quarter federal employer estimated tax payment to the IRS. This is done with Form 1040-ES.
- Give your employee(s) their W-2s so they can begin filing their personal income tax returns.
- Remit payment for 2012 fourth quarter state unemployment taxes
- If state income tax is required to be withheld, submit 2012 fourth quarter payment

February 28

Mail Form W-2 Copy A and Form W-3 to the Social Security Administration. These forms summarize the tax and wage information for your household employee(s) and ensure that she receives Social Security income and Medicare during her retirement years.

NOTE: If you file your W-2 Copy A electronically, you do not have to file a W-3 and have an extended deadline of April 1.

Just a reminder, if you had a household employee during 2012, but did not withhold any taxes, it’s not too late to get her “on the books.” We handle nanny taxes for many late filing families during this time of the year and have success in getting late filing fees waived or dramatically reduced.

Tuesday Tax Tip for Household Employers

When hiring a domestic worker to work in your home (i.e. nanny, health aide, housekeeper, etc.), you can reduce the taxes for both you and your employee by taking advantage of the IRS-approved non-taxable forms of compensation.  When a household employer pays for any of the following expenses for their employee, the payments are not considered taxable wages so neither the employer nor the employee has to pay any taxes on that portion of the compensation:

• Health Insurance
• College Tuition & Books (up to $5,250 per year)
• Parking (up to $240 per month)
• Public Transportation (up to $125 per month)
• Mobile Phone Service

If any of these expenses apply in your situation, call us and we can make sure you set up payroll correctly to minimize your "nanny tax" liability -- and the tax liability for your nanny.

Since we became household employers and started Breedlove & Associates back in 1992, the question of worker classification has come up almost every single day in one form or another -- Is she my employee or an independent contractor?  Can't I just give her a Form 1099 at year end?  If she agrees to be an independent contractor, is it legal? 

Unfortunately, a lot of the answers floating around on parent forums and other websites are flat out wrong -- and lead families into expensive mistakes.  We feel like it's our job to share the correct information so families don't get blindsided by legal problems.  So, here's what you need to know.

The IRS has a 20-point test to determine worker classification.  In virtually all cases, the IRS has ruled that domestic workers (i.e. nannies, housekeepers, senior caregivers, personal assistants, chefs, estate managers, etc.) are employees of the families for whom they work.  It doesn't matter what the contract says or what the worker calls herself, the family is legally considered the employer and, therefore, they are subject to household labor laws and the "nanny tax" obligations.

Why does the IRS care?  It's all about tax dollars and funding the programs that provide worker benefits and protections.  Employers are required to match the employee's Social Security and Medicare taxes as well as pitch in to the state and federal unemployment pools that fund unemployment benefits.  Without these contributions, workers find themselves without retirement income, health insurance during retirement or temporary income in the event of a layoff.

For these reasons, the IRS and the Department of Labor have teamed up recently to begin an unprecedented effort to crack down on worker misclassification.  It's simply not worth the tax evasion charges -- and corresponding fines, back taxes and interest.

If you have any questions about worker classsification, please don't hesitate to give us a call.  We're here to help.

If you pay a domestic worker (i.e. nanny, housekeeper, senior caregiver, etc.) $1,800 or more in a calendar year, you are required to withhold Social Security and Medicare taxes (currently 4.2% and 1.45%, respectively) from your employee's pay. Collectively, these taxes are known as "FICA." Employers who fail to withhold the FICA taxes are responsible for paying them for their employee.

For more information about the "nanny tax" withholding requirements, visit our Expert Advice page/video: http://bit.ly/O8LiRo

If you're a household employer and you've recently prepared and distributed a Form W-2 to your employee, don't forget that a copy of the W-2 needs to go to the Social Security Administration (SSA) by the end of February.  It's the employer's responsibility to file the 2011 W-2 Copy A and W-3 with the SSA on behalf of each employee who was paid $1,700 or more during 2011 (the 2012 threshold is $1,800).

This part of the "nanny tax" paperwork ensures that your employee receives the proper "earnings credits" from the SSA.  These credits are used to calculate the amount of benefits she will receive during retirement.  Retirement benefits are based on an income replacement formula that factors the worker's highest 35 years of earnings.  So, the greater her earnings credits, the more golden her golden years will be.