This year, a Wall Street Journal article revealed a troubling fact: Only 5 percent of the 3.6 million American households that should be paying household worker taxes are doing so. New research provides evidence of the massive underpayment of “Nanny Taxes” owed by employers of household workers, and a number of prominent Americans have been implicated in the scandal.
According to the story, Nanny Tax no-compliance is far more common than the media let on. The issue famously surfaced in 1993, when Zoe Baird’s U.S. Attorney General nomination by President Bill Clinton was derailed by a household worker tax issue. More recently, Mick Mulvaney, former Director of the Office of Management and Budget paid an outstanding $15,000 in federal taxes and fees for babysitting services. If you haven’t been deducting payroll tax from you nanny’s paycheck, you aren’t alone.
Economist Brian Erard estimates the total federal tax gap – also known as the amount owed but not paid – at between $3.3 billion and $5.7 billion for 2015. Erard also told the Wall Street Journal that Americans pay less than one-third of Nanny Taxes owed. Compared to the 82 percent compliance rate of all federal taxes, this number is abysmal.
Understanding the Nanny Tax
So, what does this mean? If you’re not paying taxes on household worker wages, the window to continue this negligence without fearing hefty penalties may be closing. The IRS has yet to announce a campaign to catalyze Nanny-Tax compliance, but the recent uptick in national interest has some economists anticipating a crack-down. Luckily, paying the Nanny Tax is easier than you might think, especially with the right tools in your kit.
Your tax responsibility as a household employer is not one to be taken lightly, but you should know thee taxes aren’t only paid on Tax Day. Just as your paycheck has taxes for Social Security, Medicare and unemployment, so should your nanny’s. This amount should be deducted and reported with every paycheck, and household employers must file the appropriate tax and wage forms quarterly and annually. This sounds like a lot of work, but if you neglect these taxes, they could burn you in the future—especially with an IRS initiative on the horizon.
Nanny payroll taxes are the same as other employee taxes; the employer and employee typically split the 15.3 percent FICA tax liability that goes to Medicare, Medicaid, and Social Security. However, many household employers often choose to simplify their payroll tax reporting and end-of-year filings by using Form 1040 Schedule H. Employers will also want nannies to fill out Form W-4 in order to calculate the income tax withholdings. If this sounds like a lot of work, it is – if you file and calculate manually. This is where AMS Payroll can help.
W2 - 1099 Forms Filer Pricing
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Using Nanny Payroll Software as a Solution
Simplifying your household employee tax process is easier with a payroll software in your back pocket. Most nanny employers don’t have the time to prepare these taxes and paychecks, and keeping tabs on ever-updating payroll data can be impossible without a proper system in place. Nanny payroll software is will calculate the necessary taxes, print checks accordingly, and allow employers to electronically file several federal forms. Plus, the software will automatically save payroll information in a back-end database, easing your end-of-year filing process. The nanny tax might seem daunting at first, but with the right tools, it will barely register a worry.