The Legal Review Bringing the Law to Life for the Household Employment Industry ___________________________________________________________________________________
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NannyShare arrangements have become increasingly popular over the past couple of years. This is because it is significantly cheaper to share a nanny than to employ one alone and both families can capitalize on tax breaks if the nanny is paid legally by both families. But many times, only one family follows through with this commitment. This case is an example of the negative financial consequences of mismanaging the tax and payroll process in a NannyShare.
The Cole family and the Whitman family agreed to employ a nanny to care for their children at the same time. The families settled on a total salary of $32,000 for their nanny with the Coles paying the full $32,000 in wages and getting a reimbursement check from the Whitmans each bi-weekly pay period for their half of the wages. Additionally, after going online to calculate the employer taxes, the Coles estimated that the tax liability would be approximately $1,500 per family for the year. These costs were to be reimbursed at the end of each quarter.
In a NannyShare arrangement, the law views both families as separate household employers. In order to be compliant, each family must:
– Set up state and federal tax IDs
– Withhold the proper taxes from the nanny’s pay
– Prepare and file federal and state employment tax returns and remit their portion of the employee and employer taxes (based on their portion of the wages)
– Provide a Form W-2 to their employee at the end of each calendar year
– File Forms W-3 and W-2 Copy A with the Social Security Administration each year
– Prepare and attach a Schedule H to their personal income tax return
While it seems more convenient to let one family handle everything, this practice is illegal. It also disqualifies the other family – in this case the Whitmans – from taking advantage of the dependent care tax breaks.
The Coles managed the payroll process on their own and then gave all the paperwork to their CPA at the end of the year. The CPA charged a total of $1,900, which was split between the two families. All told, each family had invested $18,450 into the employment of the nanny. The Coles presented their payroll and tax filing receipts to the husband’s HR department and their CPA. They were very pleased to get a tax break totaling $2,500.
The Whitmans also pursued their tax break, but they were denied the $2,500 savings since they had not met all the requirements of the state and federal tax process. Mrs. Whitman’s HR department was forced to reject the family’s receipts because there was no proof that they paid legally. Aside from losing out on the tax breaks, the Whitmans took on unnecessary risk because any potential wage dispute or unemployment claim filed by the nanny would name the family as an employer. The state – and possibly the IRS – would pursue back taxes, penalties and interest from the family for failing to file the appropriate tax returns.
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