Finishing the Hire
The main culprits are procrastination and misinformation. Many families think they can "just handle it next April" with their tax return. Others make plans to "take care of it in a few weeks, after we're sure she's going to work out" -- and then, of course, are very slow about getting around to it.
Unfortunately, these well-intended families often have to pay dearly for their negligence, as even small oversights can quickly turn into big, expensive problems. This case illustrates one of those situations and dramatizes why, in the employment world, problem-prevention is much smarter than problem-resolution.
A family in Minnesota hired a nanny to care for their two young children in January of 2010. Exhausted from a prolonged search and vetting process -- and feeling the need to quickly re-focus on their recently-neglected careers -- the family hastily got her situated with the kids and went back to work.
"Deep down, we knew there was some nanny tax paperwork and some HR things we needed to do, but I needed to get back to work and I figured we could deal with it all later."
The family paid her the agreed-upon wage amount of $570 per week (38 hours/week @ $15/hour). They did not withhold any taxes from the employee's pay nor did they pay any employer taxes. Fourteen months later, in March of 2011, they sat down with their accountant and divulged that they had paid $29,000 in wages to a nanny during the 2010 tax year.
Federal and state law requires that household employers fulfill a very specific list of requirements:
- Obtain state and federal tax IDs as household employers
- File a New Hire Report with the state
- Get the employee to fill out Form W-4 and withhold taxes from the employee's pay in accordance with the employee's selections. In addition to income taxes, Social Security & Medicare taxes (collectively known as "FICA") should be withheld
- File quarterly state employment tax returns and remit all state taxes (the employee's state withholdings as well as the employer's state taxes)
- File 1040-ES four times per year and remit all federal employment taxes (the employee's federal withholdings as well as the employer's federal taxes)
- Provide the employee with Form W-2 itemizing wages paid and taxes withheld during the previous calendar year. The W-2 should be mailed to the employee by the end of January
- File W-2 Copy A with the Social Security Administration by the end of February
- File Schedule H along with the federal income tax return by April 15th
- Adhere to employment laws
After meeting with their CPA in March, they realized they had to clean up two key mistakes:
- Since they didn't withhold FICA from the employee's pay, their options were to try to collect them from the nanny in arrears (more than $2,200 in 2010 - plus another $400 in the first 3 months of 2011) or cover the taxes for her.
- Since they hadn't made any state employment tax filings, they needed to file delinquent returns for each quarter and pay back taxes plus penalties and interest to the state of Minnesota.
- The CPA sent the family to Breedlove and Associates to establish tax IDs, file quarterly employment tax returns for 2010, prepare and distribute Form W-2 to the employee, file Form W-2 Copy A with the Social Security Administration and prepare Schedule H prior to the April 15th deadline.
- The family opted to cover the employee's FICA taxes for 2010 and the first three months of 2011.
- We petitioned to the state of Minnesota and were able to get the penalties waived for the four delinquent quarterly employment tax returns.
If the family had "finished" the hiring process with a quick assessment of the financial and legal aspects of being a household employer, they would have realized that getting payroll setup correctly is fundamental to the relationhip -- and cannot be put off until next April or even next month. Addressing it at the time of hire would have saved this family more than $2,600.
"We rushed back to work and neglected this part (of the hiring process). I wish I had taken a few minutes to familiarize myself with the law. After reading your website and talking to you guys, I'm kicking myself. I should have run payroll scenarios for my nanny and spelled out the withholding amounts when I made her offer. You would have saved me a ton of money."
We're here to help your families avoid tax and legal mistakes, which is always a lot cheaper and easier than fixing them. A quick assessment will allow us to guide families safely past all the applicable tax and labor law issues. Whether the family joins our service or not, this 10-minute phone call will likely save them "a ton of money." For more information check out http://www.breedlove-online.com/.
Reposted from May 2011
Reposted from May 2011