[IMGCAP(1)]With tax season in full swing, it’s a good reminder that families with household employees have some impending deadlines. As most tax professionals are aware, the often overlooked household employment taxes or “nanny taxes” present a unique set of challenges because of families’ lack of experience with payroll, tax and labor law and, therefore, their propensity for mistakes and omissions.
If you have clients that crossed the FICA reporting threshold last year ($1,800 or more in a calendar year), here are the steps to close the books on their 2013 household employer obligations so you can process their income tax returns:
1. Confirm the fourth-quarter estimated tax payment has been sent to the IRS. Your client should have made estimated payments using IRS Form 1040-ES throughout the year. Their final payment was due on January 15 to account for the Social Security, Medicare and federal income taxes withheld from their employee during the months of September, October, November and December, as well as their employer portion of FICA and the federal unemployment tax assessment.
2. Make sure the Q4 2013 state employer tax returns were filed by January 31. Generally, household employer tax returns are due to the state by the last day of the month following quarter close. That means your clients should have filed their fourth-quarter state tax returns no later than Jan. 31, 2014. To check the requirements in your clients’ state, click here.
Note: If your client lives in a state with income taxes, they may also be required to file an annual reconciliation form, which summarizes the state income taxes withheld from their employee during 2013.
3. Ask if the Form W-2 for the employee was delivered by January 31. Many domestic employees like to get a head start on filing their personal income tax return and will start to ask questions if their W-2 is delayed.
4. Send Form W-2 Copy A and Form W-3 to the Social Security Administration by February 28. These forms should list the same information as the W-2 form provided to the employee and can be mailed to the SSA. However, if you file your client’s W-2 Copy A electronically, you have an extended deadline of March 31 and do not have to file a W-3 at all.
5. Prepare and attach a Schedule H to your client’s personal income tax return. The Schedule H is used to summarize the year’s federal wage activity (i.e. FICA, FUTA and FIT) for household employers. The total household employment taxes your client remitted during the year via 1040-ES payments should be entered on Line 59a on their personal income tax return.
6. Maximize dependent care tax breaks. If your client employed a caregiver in 2013, they will probably be eligible for the Tax Credit for Child or Dependent Care. This tax break is not tied to income level and is available as long as both spouses are employed or a full-time student. You’ll use IRS Form 2441 to claim a 20 percent savings on childcare-related expenses up to $3,000 for clients with one dependent and $6,000 for clients with two or more dependents. The tax savings of $600-$1,200 should offset a significant portion of your client’s employer tax liability.
Please be aware that if you have a client with two or more dependents who has utilized a Dependent Care Account (FSA) through their employer, you will only be able to apply the excess expenses to Form 2441. The contribution limit on a Dependent Care Account is $5,000, so if your client maximized their pre-tax contribution, they’ll only be able to claim a 20 percent savings on the additional $1,000 or an extra $200 in tax savings.
7. Discuss labor law compliance. Add value to your service by helping your clients ensure they are following complex wage and hour law requirements, such as overtime. Hawaii and California passed domestic worker bill of rights laws in 2013, and other states could potentially follow suit in 2014. Legislation like this draws more attention to nanny tax compliance and worker rights and tends to confuse families that are not used to interpreting labor law. Assuring them that the process of being compliant is not as overwhelming as it may seem will help put their mind at ease.
8. Offer non-taxable compensation as a tax savings option. Your nanny tax clients may not be aware that they can offer certain benefits to their employee and have them be considered non-taxable compensation. Consider advising them to structure their employee’s payroll to include parking, public transportation, college tuition or health insurance for 2014. It’s less expensive for your client to cover the cost than for the employee to pay with after-tax dollars.
Here’s looking forward to a prosperous and problem-free tax season and a little rest in late April.
Stephanie Breedlove is the vice president of Care.com HomePay, provided by Breedlove, which serves busy families with tax preparation and filing, payroll management, HR and labor law guidance, and expert support and advice.