In-Home Childcare Employment Issues
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The following is a general summary of your obligation for so-called nanny taxes.
Income Tax Withholding
You do not have to withhold federal income tax from your nanny's wages, because she is the one who is responsible for paying the tax. If she chooses, she can wait until she files her yearly federal income tax return to pay whatever tax she owes. If the nanny does want you to withhold income tax, and you agree to do it, then you will need to pay the withheld amounts over to the IRS. Also, She will have to provide you with a complete IRS Form W-4, the Employee's Withholding Allowance Certificate. This form tells you how many allowances your employee is claiming, based on various deductions, credits, and other income adjustments. You need to know the number of allowances in order to calculate the proper withholding.
Regardless of whether you actually withhold the income tax for your nanny, if any income or nanny taxes are owed, you will be required to report the nanny's wages. To do this, file a Schedule H (Form 1040) along with your own tax return, which is due April 15th. You also will report the nanny's wages to the Social Security Administration (SSA) by filing Copy A of IRS Form W-2, Wage and Tax Statement, along with IRS Form W-3, Transmittal of Wage and Tax Statements.
Before January 31st of the year after the year in which you paid wages to your nanny, you must provide her with Copies B, C, and 2 of the W-2 form. In order to properly file the W-2 and other necessary documents with the SSA or IRS, you will need to apply for an Employer Identification Number (EIN) from the IRS. To apply for an EIN, you must complete and file an IRS Form SS-4, Application for Employer Identification Number.
Some lower-income wage earners are eligible for a federal tax credit called the Earned Income Credit (EIC). As an employer, you also need to be aware of the EIC, because you may have certain obligations as a result of the credit.
If you agree to withhold income tax for your nanny, but when you attempt to calculate the amount of withholding, the tax tables indicate that nothing is required to be withheld (because her income is below a certain level you must give your nanny notice of the EIC. There are several ways you can do this. The most common way is to provide her with Copy B of the W-2 form. Proper notice must be given by January 31st of the year following the year in which the nanny could claim the credit. The IRS suggests that the employer of the household help give the employee notice of the EIC if her wages are not up to the EIC maximum eligible level ($31,030 in 2005).
Some employees who are able to claim the EIC also are entitled to have the EIC paid to them in advance. If your nanny provides you with a complete IRS Form W-5, the Earned Income Credit Advance Payment Certificate, you will have to calculate how much to pay. Because this is a tax credit, you also will reduce the amount of federal income tax and FICA withholding by the amount of the advance EIC payment. If you find yourself in the position of having to make an EIC payment in advance, consult IRS Publication 15, Employer's Tax Guide, for help in calculating the amount to pay.
Social Security and Medicare (FICA) Taxes
FICA stands for Federal Insurance Contributions Act and refers to Social Security and Medicare taxes that are withheld from an employee's wages in addition to federal and state income tax. You do not have to pay FICA taxes on your nanny's wages unless you pay her $1,400 or more in cash wages each year (for tax year 2005). Moreover, you do not have to pay these taxes at all if the wages are being paid to your spouse, minor child, or parent. However, there is an exception when it comes to your parent. If you are divorced and not remarried, widowed, or your spouse is disabled and cannot care for your children, and your children are under the age of 18, you do have to count the wages you pay a grandparent to watch the kids. If the total wages exceeds $1,400, you will be required to withhold FICA taxes. FICA liability is 15.3% of the employee's cash wages, which means you do not count the value of the employment benefits you give your nanny. Of the 15.3%, you and your nanny are each liable for one-half of the amount, or 7.65%. However, the employer will often simply pay the entire amount rather than withholding it, providing an extra benefit to the nanny.
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Copyright © 2005 by Linda H. Connell. Excerpted from The Childcare Answer Book with permission of its publisher, Sourcebooks, Inc.
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