Nanny-gate

June,

My wife's nanny job brought in approximately $9K this past year, but the wealthy family she works for will not reportedly be furnishing a W2 to her.

Being as honest as we can be, how (or where) can I report this $9K without getting killed on it tax-wise??

I own my own micro-business, and I also work a corporate gig as well. Any feedback will be greatly appreciated! :)

Ryan
AZ


Have to tell you, Ryan. This kind of thing really bugs me. You and your wife are being ripped off! Now, I know that most "domestic" help -- nanny, housekeepers, dog walkers, etc. really need the work and there is a lot of competition, so they will do whatever the "boss" asks. And that usually means not treating the worker fairly.

It's interesting that this is coming from someone in Arizona, that oh-so-anti-illegal-immigrant state. And, of course, we know that many of the domestics who work for legitimate citizens are illegal immigrants whose pay and benefits and insurance coverage are not what the law requires. What happens when the nanny falls down the steps? No workers comp. What happens when the kids grow up and no need for nanny? There's no unemployment compensation. You get the picture.

So, what should you do? I assume you are not going to complain to the Arizona department of labor, now called The Industrial Commission of Arizona. So you must claim the income. It's claimed on a federal Schedule C. On your wife's earnings you must pay approximately 15% in social security tax and medicare tax [that's both the employee's and the employer's share]. You must also pay income tax.

There's no getting around it.

Best,
June

Be Smart By Being Legit With Your Nanny

Hi June,

Any suggestions on paying the nanny tax and cheapest/simplest way to do so?

Thanks!
Kurt

Hi Kurt,

In tax talk we affectionately or not so affectionately refer to anyone who cleans our house, takes care of our children, cleans our yard, drives us around, or takes care of our real Nana who resides in our upstairs guest room as "a nanny." And so the tax we must pay on someone who works for us in that capacity is referred to as the "nanny tax."

The most simple way although often not the cheapest is to hire someone though an agency. The reason that's not the cheapest is because they are legitimate -- mostly -- and so they can charge more than illegitimate workers.

By illegitimate workers I mean both undocumented aliens as well as good ol' Americans simply not claiming the money you pay them to cook your meals or watch your children. In this way on $15 per hour they are avoiding about $5 per hour in taxes; On $30 per hour they are cheating the government -- that's us the taxpayer -- out of about $10 per hour.

Your other simple choice is to hire someone who has her own business. She is then an independent contractor and you do not have to pay payroll tax on what you pay her.

The determination of whether a babysitter is self-employed follows the same rules as those for any other indie. More on that right here self-employed and/or employee .

So, if the worker does not come from an agency, nor is she self-employed, and you pay her $1,700 or more during 2010 then you must treat her as an employee and do the relevant paperwork.

IRS Publication 926, Household Employer's Tax Guide spells out what you must do. It's available here http://www.irs.gov/publications/p926/index.html.

I strongly urge you to be legitimate with a household employee.

It is fair to her. She will be racking up social security points and she will be covered by your homeowners insurance should something happen, such as tripping down the stairs or having the overhead light fixture crash on her while she's washing it. [Be sure to check your homeowners or apartment insurance.]

It is better for you because you will not be committing fraud and you won't lose your house when she sues you after the glass from the light fixture lands in her eye.

Best,
June

Auto Expense: From One Work Location To Another

June --

I am technically a full-time student, but I also work as an independent contractor babysitting in different hotels in downtown Chicago. Generally, I have to drive down there and park, and I am confused about whether I can deduct my parking fees, or what not.

I do have them email me every job, which I have to check on my home computer before leaving, but I don't know if this could technically be considered "work."

Andi



Andi, being a full-time student has no bearing on whether you can be an indie or not. If you do something to make money, you are self-employed.



Only mileage from one job location to another is deductible. So from one hotel to the next: Yes.

From home to hotel: No.

Yes, parking is a business expense.

June

Nannies aren't Indies

Hello June,

I am happy to have found your website. I am going to work for a family as a nanny. I have not done this type of work before, and they will be paying me by a 1099. How do I find out more about what expenses I may be able to deduct in a position like this?

Thanks for your help!
Michelle
Glendale,Arizona


Congratulations on your new job, Michelle.

I do have not good news for you, though. If you are working for one family as a nanny then you are the family's domestic employee. You are not self-employed.

This kind of situation was a big news in the 1990s with a case about Zoe Baird. Since then people have been a bit more careful about paying nannies as legitimate employees.

SmartMoney has a short piece on nanny taxes here http://www.smartmoney.com/tax/homefamily/index.cfm?story=nanny .

Whether you're an employee or an indie, the same expenses are deductible. However, employee business expenses do not give the same tax advantage as do self-employed business expenses. You may get a complimentary list of self-employed business expenses from my website, here .

Best regards,
June