"Quality Choices for all your childcare needs."
"Quality Choices for all your childcare needs."
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The Nanny Tax
If you pay someone to watch your children, you need to know about the"Nanny Tax" and when you are responsible for paying it! Do most people pay taxes on their nannies?Since the IRS clamp down on the nanny tax laws in the mid 1990s, it hasbecome riskier for families to continue paying their nannies "under thetable". With the threat of fines, penalties and possible jail time, thenumber of families complying with this law is increasing. In 1997 an estimated60% of families using nannies filed the "household employment tax" andin 1998 there was a slight increase to 62% compliance. Paying taxes on yourchildcare provider is becoming the rule and not the exception. What are therules? In general, the Internal Revenue Service requires payroll tax filings bya domestic employer who pays a household employee more than $1200* cash wages ina calendar year. These payroll tax obligations may include: *SocialSecurity & Medicare Taxes (7.65% of Gross Wages) *FederalUnemployment Tax (FUTA) (0.8% of Gross Wages or less in Most Circumstances) *Stateunemployment and disability insurance taxes levied on the employer. *Advancepayment of the earned income credit for eligible employees. (* Wage test is $1200 for 2000, $1100 for 1998 & 1999, years 1995 -1997 were $1000) Your employee contributes to or pays: *SocialSecurity & Medicare Taxes (7.65% of Gross Wages Collected and Remitted byEmployer) *EmployeeDisability/Unemployment Taxes where required. *Federal/StateIncome Taxes Do I need to withhold taxes from my nannys paycheck?Withholding on wages paid to household employees is not mandatory.However, the employee can request that the employer withhold tax from wages.Withholding is based on allowances claimed by the employee on Form W-4,"Employees Withholding Allowance Certificate." My employee is not a legal resident, how do I handle employmenttaxes?The immigration status of your employee has no bearing on your obligationfor employment taxes. If your employee is ineligible for a social securitynumber, she can request an Individual Taxpayer Identification Number. Thisnumber is used on all tax reports and returns. The IRS is prohibited fromsharing this information with the Immigration and Naturalization Service.Non-payment of taxes is a reason for an aliens immigration petition to bedeclined. Now for some good news! You may be surprised to hear that thebenefits of paying your employee legally can far outweigh the costs. With thesebenefits, being legal just makes good "sense."Employer Benefits.There are two federal tax benefits, which you may be entitled to receive: Dependent Care Account. Your company(or your spouses) probably has a benefit plan that allows you to contributeup to $5,000 of your pretax earnings to a Dependent Care Account to coverdependent care costs you incur during the year. This means you wont have topay any taxes on up to $5,000 of your earnings! Assuming you have a typicalmarginal tax rate of 40%, youll save a whopping $2,000 in taxes(40% of $5,000)! Tax Credit for Child or Dependent Care. Thiscredit can be claimed when you file your Form 1040 and can amount to tax savingsof $1,440. Ifyou are not already paying employment taxes for your nanny, you should considerit. Being legal simply makes good "sense." The benefits truly doexceed the costs and you wont have to worry about getting caught and facingcivil and criminal penalties. |
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