Families who hire nannies, cooks, housekeepers, nurses, etc.

are legally considered household employers

and must adhere to household employer payroll tax law.

An Overview of the Law

If a family pays any individual more than $1,700 (2010) in a calendar year, they are required to process payroll and payroll taxes (often referred to as “nanny taxes”) much in the same way a company does. They are required to withhold certain taxes from their employee’s paycheck (Social Security, Medicare, Income Taxes and, in some states, other taxes for things like disability insurance). At the end of the quarter, they have to report and remit those employee payroll taxes – along with some employer taxes (Social Security, Medicare, Unemployment Insurance and, in some states, other taxes for things like workforce development) to the state and federal tax agencies.

At the end of the year, they also have to provide their employee with a W-2, file a W-3 with the Social Security Administration and prepare a Schedule H – the government form detailing household employment activity for the year (the Schedule H accompanies the employer’s personal income tax return).

Finally, the employer must comply with all the state and federal labor laws (i.e. overtime, minimum wage, workers’ compensation) in order to avoid an expensive legal dispute.

For a complete explanation of the financial and legal responsibilities for household employers to pay employee taxes, click on the Learn About Tax & Labor Law button above.

The Dilemma

Due to all that work, and a misconception that employee payroll taxes will dramatically increase the cost to families, many Americans throw in the towel and decide to pay their employee illegally.  According to the latest figures, there are approximately 1.2 million households who employ nannies, yet there are only about 225,000 Schedule H’s filed each year.  That means roughly a million families are breaking the law and putting themselves at considerable financial risk.  Additionally, the million nannies they employ will receive none of the benefits other American workers receive, such as unemployment assistance, earned income credit, Social Security, Medicare, disability, and credit worthiness.  These benefits/protections are especially important in this economic climate.

These benefits/protections are funded via payroll taxes, which costs employers about 9-10% of gross wages.  However, these employer tax costs can be offset – sometimes more than offset – by tax breaks such as the Child or Dependent Care Tax Credit or the Dependent Care Account (a.k.a. "flexible spending account").  Families who have access to a Dependent Care Account (almost 80% of the professional workforce) save up to $2,300 per year depending on their marginal tax rate.  But families can only take advantage of this tax break if they pay legally.

If they don’t pay legally, there is a risk of tax evasion charges. In April 2006, the IRS announced that they are cracking down on employers who pay in cash or try to misclassify employees as independent contractors (both are illegal tactics designed to dodge payroll taxes).  Families who get caught will face back taxes, penalties and interest, plus they are required to pay the employee’s portion of FICA (Social Security + Medicare) which is equal to 7.65% of the gross wages.  In some cases, the federal felony tax evasion charge can cause loss of professional license and, therefore, livelihood.  Many experts predict that the current economic climate of heavy unemployment will force tax agencies to become even more aggressive in their enforcement efforts.

All things considered, paying illegally is a pretty big gamble – especially when you consider that, for most people, the tax breaks would have covered most, if not all, of the tax costs.  It’s all risk and no reward. 

Here’s an illustration of what happens every day in every state.

The Johnson family hires Nina D'Nanny to care for their children, but they pay her illegally. After a few years, the kids are all in school and the Johnsons decide to let Nina go. Out of work, Nina walks into the state unemployment office and files for unemployment benefits. She lists the families she’s worked for over the past several years, including the Johnsons. The unemployment office reviews the contributions from each of the families and finds that the Johnsons didn’t file any returns or pay into the unemployment insurance fund.  Nina doesn’t get the benefits she needs and now the state and federal tax agencies are coming after the Johnsons for back taxes, penalties and interest. The Johnsons are now in tax audit purgatory – and it all could have been easily avoided.

Providing An Affordable Solution

Breedlove & Associates was formed in 1992, by Stephanie and Bill Breedlove – professional parents with a nanny to help care for two small boys.  Wanting to comply with the law, they were frustrated by their inability to find anyone who could efficiently handle all the paperwork and guide them through the complex state and federal compliance process.  Requiring specialized knowledge – and being a relatively small market segment – most general tax professionals didn’t want to tackle their household employment taxes or quoted them a large fee.  They tried to do it themselves and found it to be incredibly frustrating and time-consuming (the IRS estimates it would take the average individual 50-55 hours per year to manage the entire process – even with access to online tools like our nanny payroll calculator).  But when you and your spouse are working and you have small children at home, do you really want to spend 50 hours of precious free time on tax and payroll duties?

Bill and Stephanie Breedlove learned the federal tax and labor law – as well as all the nuances, exemptions and exceptions for each state. They built a model that focused on providing comprehensive management of all the financial, legal and HR aspects of household employment – for an affordable fee (typically less than half of what a commercial payroll service and tax professionals charge). In addition to all the deliverables that have to be handled with accuracy and timeliness, they put special attention on providing expert support and guidance through every step of the process – so that clients would never feel the anxiety and stress that Bill and Stephanie felt almost two decades ago. For about the price of a cup of coffee each day, families can now eliminate all the paperwork, stress, and risk associated with being a household employer.

Now, more than 16,000 clients and $1.5 billion in household payroll later, Breedlove & Associates is widely recognized as the leader in this highly specialized industry. Breedlove & Associates regularly speaks at seminars and conferences. Household staffing agencies in all 50 states call on Breedlove & Associates to provide household tax and labor law training to their staff so they can advise families in the early part of the hiring process and help them budget accurately.

If you have a question about tax law or labor law for household employers, Stephanie Breedlove or Tom Breedlove can answer it – as well as share almost two decades worth of stories. Contact Stephanie or Tom at 888-BREEDLOVE (273-3356)

Emails:

stephanie@breedlove-online.com

tom@breedlove-online.com

Fast Facts About The Industry

Fast Facts About Breedlove & Associates