This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.
If you employ someone to work for you around your house, it is important to consider the tax implications of this arrangement. While many people disregard the need to pay taxes on household employees, they do so at the risk of stiff tax penalties.
As you will see, these rules are quite complex, even for such a relatively minor employee, and a mistake can bring on tax headaches.
Who Is a Household Employee?
The "nanny tax" rules apply to you only if (1) you pay someone for household work and (2) that worker is your employee.
Household work is work done in or around your home by baby sitters, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers.
A household worker is your employee if you can control not only what work is done, but how it is done. If the worker is your employee, it does not matter whether the work is full-time or part-time, or that you hired the worker through an agency or from a list provided by an agency or association.
It also does not matter whether you pay the worker on an hourly, daily, or weekly basis, or by the job. On the other hand, if only the worker can control how the work is done, the worker is not your employee, but is self-employed. A self-employed worker usually provides his or her own tools and offers services to the general public in an independent business.
If an agency provides the worker and controls what work is done and how it is done, the worker is not your employee.
Example: You pay Betty to baby sit your child and do light housework four days a week in your home. Betty follows your specific instructions about household and child care duties. You provide the household equipment and supplies that Betty needs to do her work. Betty is your household employee.
Example: You pay John to care for your lawn. John also offers lawn care services to other homeowners in your neighborhood. He provides his own tools and supplies, and he hires and pays any helpers he needs. Neither John nor his helpers are your household employees.
Can Your Employee Legally Work in the United States?
It is unlawful for you to knowingly hire or continue to employ an alien who cannot legally work in the United States.
When you hire a household employee to work for you on a regular basis, he or she must complete the employee part of the Immigration and Naturalization Service (INS) Form I-9, Employment Eligibility Verification. You must verify that the employee is either a U.S. citizen or an alien who can legally work and then complete the employer part of the form. Keep the completed form for your records.
Tip: Two copies of Form I-9 are contained in the INS Handbook for Employers. Call the INS at 1-800-755-0777 to order the handbook or additional copies of the form or to get more information.
Do You Need to Pay Employment Taxes?
If you have a household employee, you may need to withhold and pay Social Security and Medicare taxes, or you may need to pay federal unemployment tax, or you may need to do both. To find out, read the table below.
Note: If neither of the two contingencies applies, you do not need to pay any federal unemployment taxes. But you may still need to pay state unemployment taxes.
You do not need to withhold federal income tax from your household employee's wages. But if your employee asks you to withhold it, you can choose to do so.
Tip: If your household employee cares for your dependent who is under age 13 or your spouse or dependent who is not capable of self-care, so that you can work, you may be able to take an income tax credit of up to 30% of your expenses. If you can take the credit, you can include your share of the federal and state employment taxes you pay, as well as the employee's wages, in your qualifying expenses.
State Unemployment Taxes
You should contact your state unemployment tax agency to find out whether you need to pay state unemployment tax for your household employee. You should also find out whether you need to pay or collect other state employment taxes or carry workers' compensation insurance.
Note: If you do not need to pay Social Security, Medicare, or federal unemployment tax and do not choose to withhold federal income tax, the rest of this publication does not apply to you.
Social Security and Medicare Taxes
Both you and your household employee may owe Social Security and Medicare taxes. The taxes for each of you are 7.65% (6.2% for Social Security tax and 1.45% for Medicare tax) of the employee's Social Security and Medicare wages. You are responsible for payment of your employee's share of the taxes as well as your own. You can either withhold your employee's share from the employee's wages or pay it from your own funds. Note the limits on the table above.
Wages Not Counted
Do not count wages you pay to any of the following individuals as Social Security and Medicare wages:
Note: However, you should count wages to your parent if both of the following apply: (a) your child lives with you and is either under age 18 or has a physical or mental condition that requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter, and (b) you are divorced and have not remarried, or you are a widow or widower, or you are married to and living with a person whose physical or mental condition prevents him or her from caring for your child for at least 4 continuous weeks in a calendar quarter.
Note: However, you should count these wages to an employee under 18 if providing household services as the employee's principal occupation. If the employee is a student, providing household services is not considered to be his or her principal occupation.
Also, if your employee's Social Security and Medicare wages reach $106,800 in 2010 or 2009, do not count any wages you pay that employee during the rest of the year as Social Security wages to figure Social Security tax. (But continue to count the employee's cash wages as Medicare wages to figure Medicare tax.) You figure federal income tax withholding on both cash and non-cash wages (based on their value). However, do not count as wages any of the following items:
As you can see, the tax considerations for household employees are complex. Therefore, professional tax guidance is highly recommended. Please contact us for further information.
Filing a past due return may not be as difficult as you think. Taxpayers should file all tax returns that are due, regardless of whether or not full payment can be made with the return. Depending on an individual's circumstances, a taxpayer filing late may qualify for a payment plan. All payment plans require continued compliance with all filing and payment responsibilities after the plan is approved. It is important, however, to know that full payment of taxes saves you money.
Here's What to Do:
Gather Past Due Return Information
In order for the IRS to assist with preparing a tax return, taxpayers should bring any and all information related to income and deductions for the tax years for which a return is required to be filed.
Prepare and File Forms
You'll need to get the proper forms and publications. Then sign and date your tax return and send to the correct address.
Getting Free Help
The IRS offers free assistance by computer, telephone, and facsimile, and in person. The IRS can assist taxpayers with obtaining forms, publications, and answers to a wide range of tax questions.
Payment Options - Ways to Make a Payment
There are several different ways to make a payment on your taxes. Payments can be made by credit card, electronic funds transfer, check, money order, cashier's check, or cash.
Payment Options - For Those Who Can't Pay in Full
Taxpayers unable to pay all taxes due on the bill are encouraged to pay as much as possible. By paying as much as possible now, the amount of interest and penalties owed will be lessened. Based on the circumstances, a taxpayer could qualify for an extension of time to pay, an Installment Agreement, temporary delay, or Offer in Compromise.
Taxpayers who need more time to pay can find out in just a few minutes whether they qualify for a payment agreement with the IRS. Just click on the Online Payment Agreement link and follow the prompts. By entering some basic information about their tax situation, eligible taxpayers can set up in a matter of minutes either a short-term payment extension or a monthly payment plan.
What Will Happen If You Don't File Your Past Due Return or Contact the IRS
It's important to understand the ramifications of not filing a past due return and the steps that the IRS will take. Taxpayers who continue to not file a required return and fail to respond to IRS requests for a return may be considered for a variety of enforcement actions.
Please contact us for further information and support on your late returns.
Two new tax benefits are now available to employers hiring workers who were previously unemployed or only working part-time. These provisions are part of the Hiring Incentives to Restore Employment (HIRE) Act enacted into law by President Obama on March 18, 2010.
Employers who hire unemployed workers this year (after Feb. 3, 2010 and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from their share of Social Security taxes on wages paid to these workers after March 18, 2010.
This reduced tax withholding will have no effect on the employee's future Social Security benefits, and employers would still need to withhold the employee's 6.2-percent share of Social Security taxes, as well as income taxes. The employer and employee's shares of Medicare taxes would also still apply to these wages.
In addition, for each worker retained for at least a year, businesses may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns.
The two tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives do not qualify.
In addition, the new law requires that the employer get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for someone else during the 60-day period. The IRS is currently developing a form employees can use to make the required statement.
Businesses, agricultural employers, tax-exempt organizations, and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly hired employees. Household employers cannot claim this new tax benefit.
Employers claim the payroll tax benefit on the federal employment tax return they file, usually quarterly, with the IRS. Eligible employers will be able to claim the new tax incentive on their revised employment tax form for the second quarter of 2010.
Revised forms and further details on these two new tax provisions will be posted on IRS.gov during the next few weeks.
Many small businesses and tax-exempt organizations that provide health insurance coverage to their employees now qualify for a special tax credit.
Included in the health care reform legislation - the Patient Protection and Affordable Care Act - which was approved by Congress and signed by President Obama on March 23, the credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.
In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.
The maximum credit is 35 percent of premiums paid in 2010 by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations. In 2014, this maximum credit increases to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible employers that are tax-exempt organizations.
The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low- and moderate-income workers. It is generally available to employers that have fewer than 25 full-time equivalent (FTE) employees paying wages averaging less than $50,000 per employee per year. Because the eligibility formula is based in part on the number of FTEs, not the number of employees, many businesses will qualify even if they employ more than 25 individual workers.
The maximum credit goes to smaller employers - those with 10 or fewer FTEs - paying annual average wages of $25,000 or less.
Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt employers, the IRS will provide further information on how to claim the credit.
The IRS will use postcards to reach out to millions of small businesses that may qualify for the credit.
The postcards will encourage small business owners to take advantage of the credit if they qualify.
For more information about the credit, please call us or visit the IRS Web site, IRS.gov.
You can go online to check the status of your 2009 refund 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after you mail a paper return. Be sure to have a copy of your 2009 tax return available because you will need to know your filing status, the first Social Security number shown on the return, and the exact whole-dollar amount of the refund.
You have three options for checking on your refund:
The IRS does not send taxpayers unsolicited e-mails about their tax accounts, tax situations, or personal tax issues. If you receive such an e-mail, most likely it's a scam.
IRS impersonation schemes flourish during filing season. These schemes may take place via phone, fax, Internet sites, social networking sites, and particularly e-mail.
Many impersonations are identity theft scams that try to trick victims into revealing personal and financial information that can be used to access their financial accounts. Some e-mail scams contain attachments or links that, when clicked, download malicious code (a virus) that infects your computer or directs you to a bogus form or site posing as an IRS form or Web site.
Some impersonations may be commercial Internet sites that consumers unknowingly visit, thinking they're accessing the genuine IRS Web site, IRS.gov. However, such sites have no connection to the IRS.
Employers - Social Security, Medicare, and withheld income tax. File Form 941 for the first quarter of 2010. This due date applies only if you deposited the tax for the quarter in full and on time.
Employees - who work for tips. If you received $20 or more in tips during April, report them to your employer. You can use Form 4070.
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in April.
Employers - Social security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in April.
Not for Profit Agencies. If you are a not for profit agency with a December 31 year end, file form 990 (Return of Organization Exempt From Income Tax) on or before May 17, 2010.
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