Have a nanny and a company?  If so, you may be tempted to pay your nanny through your business payroll.  Why not?...payroll is payroll, right?

Well, the IRS sees it differently.  All employees paid through companies must be "direct contributors to the success of the business" because businesses are entitled to tax deductions on payroll expense.  If you pay a personal employee through the company, the payroll expense will be inflated by someone who is not a "direct contributor" and, therefore, the company will be guilty of taking an illegal tax deduction.

Additionally, businesses (except for Sole Proprietorships and For-Profit Farms) are not allowed to report household employee payroll or remit household employee taxes as part of their employment tax process.  There is a separate process for household employment, with different forms and deadlines.

When hiring a nanny (or any other type of household employee), keep in mind that there are several forms of compensation that are considered "non-taxable" -- meaning neither you nor your employee would owe any taxes on that portion of the compensation.  By strategically structuring your payroll, you and your nanny can save thousands of dollars.  Here are the IRS-approved forms of non-taxable compensation:

HEALTH INSURANCE

Up to the full amount of her premium 

COLLEGE TUITION & BOOKS

Up to $5,250 per year towards tuition and books at an accredited college or university

PUBLIC TRANSPORTATION

Up to $230 per month for mass transit to and from work

PARKING

Up to $230 per month for parking at the job site

Taking advantage of the non-taxable forms of compensation is a great way to optimize your nanny's take-home pay without increasing your employer costs.  If you have questions or need help, let us know.

Just got a call from a family in Minnesota who made a mistake everyone should learn from.

In an effort to simplify their life, they put their nanny on their company payroll and company benefits plan.  A large health insurance claim was denied by the insurance company on the grounds that she is not an employee of the company.

In addition, the company had taken illegal deductions on her payroll expense since the IRS does not view her as a direct contributor to the success of the business.  The family had to amend business and personal tax returns for the last 2 years. 

Instead of taking business tax deductions, the family should have handled her payroll through their personal funds, filed household employment tax returns, and taken a personal tax deduction on those childcare expenses.

If you have any questions about how to avoid this mistake, please give us a call.