Since our inception in 1992, we've provided more than 35,000 individual consultations with families regarding the payroll, tax and legal aspects of household employment.  As you can imagine, we've seen it all.  Here are 6 tips for saving money and eliminating legal risk:

1. Make sure you classify your worker correctly.

When you hire someone to work in your home, the worker is considered your employee.  Some families -- and occasionally even an accountant -- will tell you it's okay to treat her as an independent contractor (using phrases like "you can just 1099 her at the end of the year").  BEWARE of this advice.  Misclassification is considered felony tax evasion and offenders are saddled with back taxes, penalties and interest.  If you think your worker is an independent contractor, petition the IRS using Form SS-8 or call us for a professional opinion.  It's not worth the risk.

2. Make sure you withhold the proper amount of taxes from your employee's pay and keep accurate records for quarterly employment tax filing purposes.

Once you know your employee's Form W-4 allowances, you can use our Payroll Calculator to calculate a sample payroll.

3. Make sure you take advantage of the tax breaks available for childcare-related expenses.

There are two tax breaks available to most families:

• Dependent Care Account (a.k.a. "Flexible Spending Account" or "FSA"), which is administered by most companies as an employee benefit.  This program allows you to contribute up to $5,000 of your pre-tax earnings into an account for qualified childcare expenses (nanny's wages, employer taxes and placement agency fees).  The result is a savings of roughly $2,000 - $2,300 per year, depending on your marginal tax rate.
• Child Care Tax Credit.  Families can itemize up to $3,000 per child (maximum $6,000 per year) on their federal income tax return and then get a 20-35% tax credit, depending on your income.  For most families, this tax break saves $600 per child per year (maximum of $1,200 per year).  Congress is considering a significant increase in both the expense limit and the credit percentage.  If passed, most families would see their tax breaks double.  Write your congressional representatives to voice your support.

Note 1: For families with 2 or more children, it is possible to take advantage of both of these tax breaks in the same tax year, although in this case, the Child Care Tax Credit is reduced.

Note 2: These tax breaks are not income restrictive, meaning all families are entitled.  However, both spouses must be employed or full-time students and the employee must be paid legally.

4. Don't jeopardize your business by putting your household employee on your company payroll.

If you have a company, you will need to manage your household employee's payroll separate from that of your company's employees.  The IRS does not view nannies and other household employees to be direct contributors of the business enterprise.  Instead of taking business tax breaks on her payroll, you'll need to take personal tax breaks (see Tip #3).

5. Make sure you comply with federal, state and local labor laws.

There are a significant number of employment laws that affect household employers.  The laws vary depending on factors such as where you live and how many hours your employee works.  Call us and we can guide you through the issues that will affect you, such as Overtime, Paid Sick Leave, Workers' Compensation insurance, etc.

6. Consider non-taxable methods of compensation as a way to save money for both you and your employee.

Households can offer certain benefits to their employee and have them be considered non-taxable compensation (no taxes for employer or employee).  The IRS-approved benefits for households are:

• Health Insurance premiums from a state-licensed insurance provider;
• Up to $5,250 per year towards tuition & books for an accredited college or university in a related field of study;
• Up to $230 per month toward public transportation to and from the worksite;
• Up to $230 per month towards parking (at the jobsite and/or at the public transportation facility).

Strategically-structured payroll can save you and your employee a considerable amount of money each year.  To learn more about non-taxable compensation and how to take advantage of it, give us a call.