New 'nanny tax' rules simplify the paperwork


October 31, 1994|By JANE BRYANT QUINN

NEW YORK -- If you employ someone regularly at home, you probably owe a payroll tax. Headline writers call it a "nanny tax" -- but it covers house cleaners, gardeners, caretakers, paid companions and health aides as well as people who do child care.

Early this month, Congress eased the rules on nanny taxes. The law now exempts the occasional baby sitter and simplifies your paperwork. But professional home workers remain covered.

Under the new law, you owe a Social Security tax for any employee to whom you pay at least $1,000 annually. That could be a cleaning worker who earns just $20 a week. (The law exempts household workers under 18, unless that is their principal job.)

It used to be worse. Under the old law, you owed payroll taxes for anyone paid at least $50 in a calendar quarter. That could have included a teen-ager who mows your lawn or stays with your children on your nights out. Such tiny taxes were rarely paid, which turned American households into hotbeds of criminal tax evasion.

The new law takes effect this year. If it turns out that you filed payroll taxes for workers who earned less than $1,000 in 1994, you'll be able to claim a refund (although the workers will keep their Social Security credit). The trigger point for paying payroll taxes remains at $1,000 during 1995. After that, it will rise with wage inflation.

You also owe federal unemployment taxes if you pay an employee $1,000 or more in a calendar quarter. This tax carries over from previous law.

The big question is, what's an "employee"? If a home worker isn't your employee, you don't owe the tax. Unfortunately, the definition isn't clear-cut. But in general, employees work principally for you, use your materials and follow your rules about when to work.

By contrast, they are self-employed if they make their own hours, use their own equipment and seek work from a variety of clients. In that case, they're responsible for their own payroll and unemployment taxes. All you owe them is an annual 1099 form, totaling their earnings for the year.

If you do owe the tax, the new law should simplify the system. Currently, you pay quarterly and have to fill out a special form.

In 1995 through 1997, you can pay in a lump sum, on your annual tax return (remember to set aside money for it!). Starting in 1998, your liability for federal payroll and unemployment taxes must be added to your regular tax withholding or your quarterly estimated payments.

You may also owe state taxes for unemployment, disability and workers' compensation. Under the new law, the states can have their unemployment taxes collected on your federal return. But you'll still have to make the other payments directly.

The Social Security tax today is 15.3 percent. You owe half; your employee owes half. If you pay the employee's half, you have to report that amount as extra wages paid. Every January, you owe your employee a W-2 form showing annual wages paid and any sums deducted. A copy of the W-2 goes to the IRS.

It's not only illegal not to pay Social Security taxes for domestic workers, it's also unfair. Most are low-income people who will need the money in old age. Often, however, the workers themselves ask you to ignore the law. They want cash, with no paper trail, so they can duck the income tax.

An unpaid income tax is the worker's lookout. But employers are liable for paying the Social Security tax. Neglecting it might cost you thousands of dollars.

When your ex-employee retires, he or she may apply for Social Security. If the record is blank for the years you didn't pay, the worker will get a smaller check. If he or she complains, and can show proof of earnings, the government will probably come after you for back taxes plus interest and penalties. The workers aren't fined, so there's an incentive to turn you in.

A final point: Before hiring even a self-employed worker, you need proof that that person is a U.S. citizen or has the green card granted to legal aliens. Ask to see the credentials of anyone you employ directly (there's no need to check a company's employee).

Jane Bryant Quinn is a syndicated columnist. Write to her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y. 10022.

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