The Nanny Tax Nightmare

Have you consider hiring a Nanny as an INDEPENDENT CONTRACT EMPLOYEE which would require the Nanny to file her income as a Nanny using a 1099 report filed by the EMPLOYER and file her own FICA since most Nannies are independent enterpreneurs which is defined as "a person who undertakes a commerical risk for profit."

The reason we cannot treat nannies as self-employed is that a nanny does not fit the IRS definition of an independent contractor. Nannies are defined as an employee because the employer controls the nanny's responsibilities making the nanny an employee, and requiring him or her to pay taxes.

Has anyone considered hiring an nanny as an independent contract worker which would mean that the nanny would be responsible for reporting and paying her OWN income from form 1099 to the Federal government as well as paying FICA.

Not that hard:
www.paycycle.com
www.nannytaxprep.com
www.nannypay.com
www.breedlove-online.com
www.gtm.com
www.householdemploymenttaxes.com
www.4nannytaxes.com
www.payprep.com
www.nannytax.com

Your going off on this but I'm betting you haven't been here before either. You are missing the point- parents just want it to be easier to understand all these tax laws so we are doing the right thing and not land themselves in jail because it's so confusing what is what when it comes to paying taxes etc. that they make a mistake get fined or worse go to jail. And yes it's a pain in the neck too so that's why they are complaining. Just wait til you have to do your own taxes with deductions. Yes it is life but you don't have to like that part of if it you don't. So get off your high horse, go to school, become a parent and let us know how easy it is for you.

Did you never hear of paying on a 1099? Give the nanny more money to make up for it and be done with it. The average person who needs childcare shouldn't be treated as nor should they be expected to act like a business. Next you'll be told to provide medical insurance for them. Maybe it's time for nannies to band together, form their own company and handle it all as a group.

I think we should simplify the tax code and treat everyone as self employed. This would greatly simplify everything for everyone. This would let everyone know how much it actually costs to pay someone as well as let us all know just how much the government takes of our wages and other taxes. It would encourage everyone to take responsibility for themselves and promote self reliance- one of the main traits of American civilization through WWII and beyond.

Here is what should be done: raise the amount that you have to pay nannies before having to file these forms to 4,000 dollars or more.
Then, make it easier to figure out how much tax you should pay by making it a flat rate added onto what you pay the nanny, based on how much you pay them per year.
Let us be real: most regular citizens are NOT going to be able to figure this stuff out.... let's stop making them figure it out and make it so easy that a 5 year old could do it.

Sorry, I don;t buy it. We had a nanny and initially did not pay the taxes, resting on the accepted wisdom that it was too complex to be reasonable and no one would ever know. Then the 1040 form changed, scaring us by making inaccuracy on the form a potential felony. We dug in figured it out and started paying her. Yes, it cost money. That's the point. It was not easy, but it was doable with a little research. But it put us on the right side of the law, and our nanny, whom we loved, in line for some retirement support later As for difficulty, I do more difficult things on the job every month, as do most professionals. Once you figure it out its done. People need to stop rationalizing and accept a little responsibility.

Here Here! I hope Obama reads this article. We too paid $600 a year just to have someone else handle the paperwork nightmare. They should raise the threshold, simplify the process and give a tax credit to parents who are actually EMPLOYING people. In my opinion, having to pay for childcare employment taxes is like double taxation. You pay income tax on your income and then they tax you again on the income you are providing someone else!

All tax code interpretation debate aside, the story itself was about making it easier to understand the law & filing the appropriate returns timely .. and making it less time-consuming to follow the law. As this discussion thread shows .. there's definitely work to be done in this area of our federal and state tax code. Congress .. are you listening!?! :-)

Yes, I agree, all of the tax code is open to interpretation until a court ruling defines the code section. We deal with this everyday. That being said, we must responsibly interpret the code in such a way that is reasonable and customary. We also should look at previous rulings that have similar details even if outside of the field in question. When we (all taxpayers) fail to do so, we are promoting abusive tax shelters and illegal tax schemes We can not ever cross that line and that is where the formal determinations come in. I would never put my client (or my practice) at risk.

Yendor33 posted: Why does a nanny have to be considered an employee?

The IRS has strict rules/laws to determine employee vs contractor which include (but not limited to) the service being provided, where's the service is being performed, how it is done and what hours are being worked. The actual determination form is 4 pages long, Generally speaking, it's unlikely that any in-home babysitter, nanny, caregiver or housekeeper is treated as a contractor. One can not (and should not) provide advice to one's situation unless they have all the facts and fully understands the law.

A tax attorney friend from college took it upon himself to ensure I'd have no Zoe Baird problems after I had my daughter. He ordered the forms from the IRS for me, helped me set up the spreadsheets, and explained the calculations. With the help of a professional and my diligent efforts to comply with the law, I was stunned to find I had erred by failing to pay state unemployment benefit taxes. Fortunately for me, people in the revenue department here in MO went out of their way to be helpful. They waived the fines and helped me get the right forms so that I did everything right afterward. Some people seem to think we parents are complaining about paying for childcare. That is not the problem at all. I have no problem paying what I owe. I have a problem with the IRS and states making the regulations so complicated it places an unreasonable burden on parents. You should not need a technical Ph. D. to figure out how to pay your taxes. I have that Ph. D. and still needed substantial professional help to get the nanny taxes right. That's absurd. Taxes should be doable by anyone. We should not have to pay someone to handle this for us. Those of you who simply work for someone else and get a W2 form each year just have to fill in lines on a tax form. A nanny makes doing your taxes at least 10 times more difficult in my estimation. There should be a reasonable limit on the amount of time the government can force us to devote to paperwork. We have children to raise.

A nanny does not fit the IRS' definition of an 'independent contractor', rather she fits the definition of an 'employee' i.e based on the totality of the circumstances test, the employer 'controls' the nanny thereby making the nanny an employee, and triggering the requirement to pay the various taxes discussed in this article.

a nanny does not fit the definition of an independent contractor according to the definition of an 'independent contractor' versus the definition of an 'employee' in the tax code

Why does a nanny have to be considered an employee? If a nanny is hired as a 1099-Contractor (based on his or her Social Security number), then the entire tax burden falls on the contractor. You would not have to follow "...our Byzantine payroll laws..." Instead, at the end of the year, you file a 1099 form (similar to a W2) which simply states how much was paid to the contractor. You would also give a copy to the contractor, and that is it. The person who hired the contractor would have no further federal requirements and would not need to pay Social Security taxes, Medicare taxes, Workman's Comp or Unemployment Insurance. A 1099-Contractor is hired "at will" and can be let go for any reason, or even let go for no reason. The contractor would not be entitled to unemployment benefits because of his or her contractor status. Some people would not like to be considered a 1099-Contractor because all of the taxes fall on his or her shoulders, but it is legal and better than paying under the table. The final benefit is that most likely all of the wages would be tax-deductible for the parents (please note the use of the phrase ???most likely???). So if one is going to formally hire a nanny, why not hire the nanny as a 1099-Contractor. The paperwork is far simpler with respect to payroll laws.