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Household employee or independent contractor? Why the difference matters

by Breedlove February 5, 2013

Over the years, the IRS and the state tax agencies have made it very clear that nannies, personal assistants, housekeepers and other domestic workers must be classified as employees of the family – not as independent contractors.

The distinction is not based on how many hours someone works, how much they’re paid, what type of work they perform or what they call themselves in a contract.  It is based on who’s deemed to be in control of the work relationship.

Independent contractors have control over how, when and by whom a job is performed.  On the other hand, employees follow the schedule and instructions established by the employer.

This seemingly subtle distinction matters because employer taxes are used to fund important worker benefits, such as unemployment. Additionally, misclassification costs the worker in terms of incremental tax burden; independent contractors are responsible for both the employee and employer portions of the FICA taxes, which add 7.65% to the worker’s tax responsibility.

Because of these financial implications, worker classification enforcement has become a focal point of state and federal tax agencies, who consider misclassification to be felony tax evasion. So it’s important that families understand the law and correctly report wages.  If someone tells you to “just 1099 her” beware; Form 1099 is the form that businesses use to report payments to an independent contractor. An employee’s wages should be reported using Form W-2.

To learn more about worker classification – or to correct a misclassification mistake – give us a call or visit our Expert Advice section.

Federal and State Tax Deadlines Coming Up Soon

by Breedlove January 24, 2013

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.

Workers' Comp for Nannies

by Breedlove January 9, 2013

Workers’ compensation insurance solution now available for Breedlove clients through HomeStaffPROTECT

Today is an exciting day for Breedlove & Associates clients. Through an exclusive partnership with PMC Insurance Group, we’re excited to announce HomeStaffPROTECT, the first workers' compensation insurance product created to meet the unique needs of families with nannies.

Many states require employers to carry a workers’ compensation policy to assist employees with medical bills and lost wages in the event of a work-related injury or illness. The policy also protects employers from lawsuits because employees who opt for workers’ compensation benefits generally forfeit their option to sue the employer, regardless of fault.

Recently, families have started telling us that finding an affordable, stand-alone policy has become very difficult -- next to impossible in some states.  HomeStaffPROTECT is our solution to the problem and we're very proud to make it available to Breedlove clients.

Keep in mind, workers’ compensation is not a payroll tax on employees or employers. It is purchased by employers as an insurance policy with an annual premium.

Note: If you're required to carry workers' compensation insurance -- or you elect coverage -- we will guide you through your options as part of your account setup.  Through our streamlined application process, obtaining a policy can be completed online in less than 5 minutes.

Click here to see if workers’ compensation is required in your state and don’t hesitate to call a Breedlove consultant if you have any questions.

2013 Nanny Tax Updates

by Breedlove January 7, 2013

As usual, there are some tax law changes for 2013 that household employers need to be aware of.  Here they are:

 

  • The "payroll tax holiday" has expired.  The social security tax has reverted to its traditional 6.2% (it was temporarily reduced during 2011 and 2012 in an attempt to stimulate consumer spending).  The change will decrease take-home pay slightly for all U.S. workers.

 

  • The FICA reporting threshold did not change.  The $1,800 threshold has been extended through 2013.  Families who pay a worker less than that amount in the calendar year are absolved of the FICA (Social Security and Medicare) reporting responsibilities under the "casual babysitting exemption."

 

  • The federal mileage reimbursement rate has increased.  The rate for mileage reimbursement increased by one penny per mile.  It's now 56.5 cents for each mile an employee drives on the job.

 

Have a safe and happy new year!

A Gift of (Breed)love

by Breedlove December 21, 2012

We got a call from a prospective client yesterday that warmed all of our hearts.  He came to us after hearing good reviews of our service from several friends.  He liked everything he heard during our free phone consultation so he decided to join the service.  We're thrilled to serve him.  But that's not the best part.

 

Before he hung up, he said he was "giving the gift of Breedlove" to his wife...she has been handling all of their "nanny tax" obligations (payroll, quarterly state employment tax returns, Form W-2, Schedule H, federal 1040-ES payments, etc.) for several years and he wants to surprise her with our service as a Christmas present.  He doesn't want her to have any more paperwork, government correspondence or deadlines to worry about.

 

Note: The IRS estimates the average household employer should budget 50-55 hours per year on payroll & tax compliance...he's excited to give her a lot more precious free time.

 

We're all so flattered to be considered present-worthy!  It made our day...heck, our whole week.  So, we made a special hand-made card that he can put under the tree. Can't wait to hear how she likes it! 

 

Happy holidays from all of us at Breedlove!

Household Employers: It's Not Too Late to Get Your Employee "On the Books" for 2012

by Breedlove December 12, 2012

Every December, we get a lot of calls from families who are trying to "clean up" their 2012 tax issues -- and getting their nanny "on the books" is very high on the list of to-do's.  Most families with a household employee know they have some obligations, but they don't really know what to do or when.  It's very common for busy families to decide to "worry about it later." 

 

However, that procrastination can leave the family and the nanny with more worries.  Most states require employers to file employment tax returns in each quarter in which there were wages paid (some even require monthly deposits).  If they're not filed on time, the state will assess late penalties and interest charges.  Additionally, when taxes aren't handled correctly, the nanny misses out on the important benefits that other professionals get, such as unemployment, social security, medicare and disability.

 

The good news is, it's not too late.  We can get families caught up in time to take care of Form W-2, Schedule H and the other year-end obligations.  As part of our setup process, we also petition the tax agencies to waive late penalties and we've had very good success getting them waived on behalf of our clients.

 

While waiting until the end of the year is not ideal (the "nanny tax" compliance tasks start at time of hire), it's easier and cheaper to take of the obligations now than it will be down the road.

New York Times Article Clarification

by Breedlove November 28, 2012

If you missed it, there was a good article in the NYTimes yesterday about the first national statistical study of domestic workers.  The study reveals that, despite a long-term trend toward greater professionalism, the household employment industry still has a long way to go in terms of eliminating worker exploitation.  It's an eye-opening study that warrants significant discussion and debate about potential solutions.

 

As industry leaders prepare for that debate, we need to clarify one element of the article.  The statement "Domestic workers are generally not covered by federal or state minimum wage laws" is not true.  The Fair Labor Standards Act was amended in 1974 to specifically include domestic workers.  They are entitled to minimum wage and overtime protections and have the right to file a grievance if their employer fails to pay them properly.  There are some narrowly-defined sub-categories within the domestic services industry that are exempt from these protections, but they do not apply frequently (casual babysitting, companion care, live-in employees in most states).

 

The point is, our domestic worker exploitation problems are not a result of inadequate legislation, but rather inadequate enforcement.  It's an important distinction.  We don't need to burden families with more regulatory hurdles or paperwork.  Busy families with dependent care needs are already strapped.  We believe the answer starts with education (families need to understand the law and workers need to understand their rights) and enforcement (let's isolate the abusers and enforce the laws we already have in place).   

IRS Mileage Reimbursement Rate Increase

by Breedlove November 26, 2012

Effective January 1, 2013, the mileage reimbursement rate will increase by 1 cent per mile (from 55.5 cents per mile to 56.5 cents per mile).  The reimbursement rate is designed to cover the cost of gasoline (plus general wear and tear) when an employee is asked to use their car for work purposes.

 

For Breedlove clients who have mileage as a standard part of the payroll, we'll automatically make that small adjustment starting in January.

Why Pay Legally?

by Breedlove October 30, 2012

Stumbled across a great article last night at www.tcpalm.com about paying household employees legally.  The article was authored by an unexpected source -- Fay Vincent, former Major League Baseball Commissioner. Thank you, Mr. Vincent.   

 

Fay Vincent: Unpaid Social Security taxes for household employees often a sad example of 'don't ask don't tell'

Fay Vincent, former corporate CEO and Major League Baseball commissioner, lives in Vero Beach.

 

Sunday, October 28, 2012

 

Shortly after I began my first job in the early 1960s as a young lawyer in a New York law firm, a senior partner summoned me and told me he needed a lawyer. With chagrin, he told me a woman housekeeper he employed for about 30 years had recently retired. He showed me a letter he had just received from authorities, asking him to document the Social Security taxes he had paid for her account.

 

Of course, he had never paid any such taxes, and when she applied for her benefit, federal officials learned of his failure. My assignment, he ruefully explained, was to determine how he should respond to the feds. I quickly did the appropriate research and returned to his office with the news that he owed many thousands in taxes and interest and had no legal basis for refusing to pay.

 

I never forgot his embarrassment. I also vowed never to make a similar mistake.

 

I am regularly surprised by the number of successful people who somehow have persuaded themselves Social Security taxes do not have to be paid for household help. My guess is the number of otherwise solid citizens who cheat on this form of taxation is enormously high. I dare you to ask your neighbors, relatives and even adult children how they regard such taxes and you will soon learn the extent of the problem.

 

The reciprocal of the problem is the number of people — usually women — who have worked for years for those like the senior partner in my old law firm only to discover when they seek to collect their old age pension that there is no earnings record of their employment, so they are out of luck.

 

Of course, some of these workers have also been cheating on their own taxes by failing to report the cash they have been paid under the table on which neither income nor Social Security tax have been withheld. The number of unfortunate older people who end up with little or no access to the Social Security system has got to be huge, but how can one be certain of the statistics when this underground economy remains submerged?

 

What bothers me is the obvious hypocrisy on the part of all the good-hearted citizens who would not think of stealing from their household employees. They do not regard themselves as doing anything seriously wrong. To them the household tax is a silly burden with no redeeming benefits.

 

These people do not stop to think that they are not just cheating the federal government, but their employees as well. The real victims are the very employees or "nannies" entrusted to raise the family children. The real victims are the women — and some men — on whom the family household depends for all the countless tasks central to modern life.

 

The employers are often the women who manage the household but who find the quarterly tax returns a great nuisance to be disregarded in the press of more important duties. And the risk of getting caught is slim.

 

There are other risks in not paying these taxes. Remember the two high-ranking women nominated by President Bill Clinton to serve as attorney general who had to withdraw their candidacies after having been found not to have paid taxes for nannies or undocumented household employees? One was even a sitting federal judge; the other was a senior business executive. They paid a price for their disregard of these taxes.

 

In some part, these Social Security taxes are grounded in turgidly expressed laws and regulations. Many household employers are ignorant of the law; others may have some idea of the tax requirements but rely on the total lack of enforcement mechanism. Some may believe they will pay when they are asked or directed to do so. But no one has explained to them the harm they are causing down the road to the employees they often claim to value highly.

 

Politicians are lyric in their praise for the benefits of our Social Security system, and properly so. One wonders, however, how many members of Congress would openly submit to confirming their adherence to these household taxes. Here is the new example of a situation best captioned — "don't look and don't tell."

 

Fay Vincent of Vero Beach is a former corporate CEO and commissioner of Major League Baseball.

Reducing Your "Nanny Taxes" and Your Nanny's Taxes

by Breedlove October 16, 2012

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.