Household Employer Tax Breaks

Household employers with dependent care expenses are generally entitled to tax breaks -- regardless of their income level -- as long as both spouses are either employed or a full-time student.  There are two tax breaks available to household employers who pay legally:

• Dependent Care Account (also commonly called a Flexible Spending Account). Most businesses allow their employees to contribute up to $5,000 of their pre-tax earnings to a Dependent Care Account to help pay for childcare expenses. This means there is no federal income tax, state income tax or FICA taxes on that $5,000 of income. Depending on your tax bracket, this deduction will save you about $2,100-$2,300 per year which will offset – sometimes exceed – your employer tax liability. Companies have considerable leeway in how these accounts are administered; check with your company’s HR department or Accounting department to learn about your enrollment options. Once set up, we can provide you with the paperwork you'll need to take advantage of this tax break.

• Child Care Tax Credit. If you don’t have access to a Dependent Care Account, you can claim the Tax Credit for Child or Dependent Care (IRS Form 2441) on your personal federal income tax return at year end. This tax credit saves $600 for families with one dependent or $1,200 for families with two or more dependents.

IF YOU HAVE 2 OR MORE DEPENDENTS: please note that the government allows families with 2 or more dependents to itemize up to $6,000 of dependent care expenses.  Therefore, if you use $5,000 for your Dependent Care Account, you may have an additional $1,000 in excess expenses that can be claimed on Form 2441, which would save you an additional $200 per year off your tax bill.

 

For most families, the tax breaks offset most -- if not all -- of the employer tax costs.  In some cases, families even come out ahead by paying legally!  For an estimate of your tax breaks, call us at Toll Free (888) 273-3356 or use our Employer Budget Calculator. 

 

 

Special Tax Advantages for Short-Term, Part-Time and ShareCare Employers

Families who hire on a short-term (i.e. summer nannies), part-time or shared basis have unique tax advantages which usually allow them to save a signficant amount of money while ensuring that their employee gets critical benefits and protections.  Here's an example:

The Smiths hire a summer nanny and pay her $500 per week for 13 weeks ($6,500 total).  The Smiths have access to a flexible spending account at work, which will save them $2,300.  Meanwhile, the Smiths will owe about $600 in employer taxes. The net savings for the Smiths is $1,700! 

The bottom line: Legal pay pays off, especially in short-term, part-time or share-care employment situations.

 

 

HIRE Act Signed Into Law

On March 18, 2010, President Obama signed into law a new job creation act entitled Hiring Incentives to Restore Employment (HIRE Act).  The HIRE Act will reduce employment costs to families who hire a qualified worker after February 3, 2010 (a qualifying worker is defined as anyone who has worked 40 hours or less in the 60 days preceding employment).

Those families who hire a qualified worker(s) will be entitled to an exemption on the employer portion of the Social Security tax.  The 6.2% exemption applies to all wages paid in 2010 between the dates of March 19 and December 31.

These savings are in addition to the childcare tax breaks detailed above.

 

 

Congress Considering Significant Increase to Tax Breaks for Dependent Care

Updated Tax Breaks Would Provide Much Needed Relief to Working Families

The tax breaks for working families with child and elder care expenses have not been updated in years.  Meanwhile, the cost of quality child care and elder care has risen steadily, squeezing the budgets of working families across the country.  Help may be on the way.

Through the International Nanny Association (INA), we have supported a lobbying effort to increase the tax breaks.  Currently, the Child or Dependent Care Tax Credit provides a credit of 20% on up to $3,000 of expenses per dependent per year (maximum of $6,000 per year per family).  This yields tax savings of $600 per year for families with one dependent; $1,200 per year for families with two or more dependents.

Due to these lobbying efforts, there are now three bills in front of Congress that would raise the expense limit to $6,000 per dependent per year ($12,000 maximum per family).  In addition, the bills would increase the credit percentage from 20% to 35-50%.  These new bills -- if passed -- would yield tax savings of $2,100 - $3,000 per year for families with one dependent; $4,200 - $6,000 per year for families with 2 or more dependents.

In order to improve the odds of these bills becoming law, we encourage everyone to take a moment to send a note to your Senators and your Representative in the House.  Most congressional leaders have an email contact form on their website, which can be found with a quick search online.

Make your voice heard for dependent care tax relief!  Five minutes could save you thousands of dollars each year.

Other Benefits of Compliance

In addition to tax breaks, there are other benefits of legal pay:

• Credit Worthiness. Your employee will be establishing a legitimate employment history, which is required in order to qualify for a car loan, home loan, student loan, credit cards and many other financial necessities.
• Social Security & Medicare. Your employee will receive retirement benefits and basic medical coverage through Social Security and Medicare contributions. Due to employer matching and compounding of interest, research shows the average legally-paid household employee will receive in retirement $5 for every $1 they contributed.
• Unemployment Benefits. Employees are generally entitled to receive up to six months of unemployment benefits at up to 50% of their salary if they lose their job through no fault of their own. This protection is critically important, especially during this period of economic uncertainty.
• Disability. Depending on your state, your employee is eligible to receive financial assistance for any disabling injury or illness that does not result from the workplace (includes maternity leave).  In addition to helping your employee, this benefit frees you up to afford a replacement employee during the period of disability.
• Workers’ Compensation. Depending on your state, your employee will receive financial assistance with lost wages and medical expenses due to injury or illness in the workplace.  In addition to helping your employee, this benefit frees you up to afford a replacement employee during the period of disability. 
• Earned Income Tax Credit. Employees may qualify for this federal tax break if they meet one of the following criteria:

1) Have 3 or more qualifying children and Adjusted Gross Income (AGI) is less than $43,279 ($48,279 if married filing jointly);

2) Have 2 qualifying children and AGI is less than $40,295 ($45,295 if married filing jointly);

3) Have 1 qualifying child and AGI is less than $35,463 ($40,463 if married filing jointly);

4) Have no qualifying children and AGI is less than $13,440 ($18,440 if married filing jointly).

 

Those who qualify can save as much as $5,657.  For more information about the Earned Income Tax Credit, please call us or visit www.irs.gov.

• Peace of Mind. The IRS is cracking down on household employers who pay “off the books” or misclassify their workers as independent contractors.  The IRS considers it tax evasion and offenders are saddled with expensive back taxes, penalties and interest.  Additionally, a felony tax evasion charge can cause loss of professional license and even imprisonment.  It’s simply not worth the risk.

© 2007-2010 Breedlove & Associates, LLC