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 Employers

Families who hire on a short-term basis (i.e. summer nannies) have unique tax advantages which 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 employment situations.

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 two or more qualifying children and Adjusted Gross Income (AGI) is less than $38,646 ($41,646 if married filing jointly);

2) Have one qualifying child and AGI is less than $33,995 ($36,995 if married filing jointly);

3) Have no qualifying children and AGI is less than $12,880 ($15,880 if married filing jointly).

 

Those who qualify can save as much as $4,824.  For 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, the felony tax evasion charge can cause loss of professional license and even imprisonment.  It’s simply not worth the risk.

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