John R. Bullis: What is the ‘nanny’ tax?

It is not enough to pay income tax, and when you die, there may be a death tax.

If you have household employees (not independent contractors), you as the employer must withhold and pay FICA taxes on their wages if the cash wages paid during 2014 or 2015 total $1,900 or more.

The employment taxes for household employees is reported on Schedule H of form 1040 of the employer (the one who pays the wages).

This “nanny” tax is not owed if the person doing the work is in business for themselves. Those folks are known as independent contractors or business owners. They are required to keep business records, and they report the income on their tax returns. They pay self employment tax (FICA and Medicare) with their form 1040.

Maybe the main idea is to be sure the worker is in business for themselves. That is more common around here than, say, in New York City.

Perhaps you remember hearing about someone that was nominated for a high position in government that failed to file and pay the payroll taxes on their household employees. Usually their name was withdrawn from consideration for the position.

The employer of household employees also must pay unemployment tax known as FUTA if the employer paid total cash wages of $1,000 or more in a calendar quarter.

Also, since the “nanny” tax increases, the amount of tax on the employer form 1040, they may need to increase the estimated tax payments to avoid a penalty for underpayment of estimated tax.

It is important to the household employee that the taxes be paid so they have FICA covered wages for possible future disability and/or retirement Social Security benefits.

The worker may have some business expenses to claim against the income if they are in business for themselves. That could reduce the worker’s income tax. There is a special provision for sole owner business folks that allows them to pay more self employment tax (FICA) than their net profits would call for. That election can be done so they have more FICA covered self employment income.

I think we have more business owners than household employees in our area. It is appropriate to find out if the worker serves others and if they are in business for themselves. Documenting that might save you some trouble later on.

Did you hear? “To ensure good health: eat lightly, breathe deeply, live moderately, cultivate cheerfulness, and maintain an interest in life.” — William Louden.

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.


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