We've had several families call recently after having made the mistake of putting their nanny on the company payroll. Understandably, they've been VERY frustrated after making a well-intentioned mistake that -- with just a little guidance -- would have been easy to prevent.
Here's a quick reminder of the law so it doesn't happen to any of you:
Business owners should manage their household employee's payroll separately from that of their company's employees. The logic is that businesses are allowed to take tax deductions on their business payroll expense. It is illegal for a company to take tax deductions on payroll expenses for any worker who is not a direct contributor to the success of the business. (The IRS has ruled definitively that nannies and other personal employees are not considered "direct contributors").
As a result, the family should pay the nanny through their personal bank account and file household employment tax returns. At that point, they are eligible for tax breaks on their personal income tax return using the childcare tax breaks.
In addition to incorrect reporting and illegal tax deduction issues, there are related problems with group health insurance. Insurance providers generally do not allow personal employees to be included on a company's group insurance policy. As a result, the insurance company may deny all of the nanny's medical claims.
If you have any questions about this topic, please give us a call at 888-BREEDLOVE (888-273-3356) or visit http://www.breedlove-online.com/. We're here to help.
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