When families hire a nanny, housekeeper, or other caregiver, it’s common to be unfamiliar with the IRS and state tax laws regarding paying domestic workers. Next thing you know, it’s January and tax prep time and you realize you owe back taxes. Or, the state might contact you when a former employee you paid under the table files for unemployment.
No matter how or when you learn about the tax and legal requirements as a home employer, it’s never too late to cover your household employment taxes. And it’s important to do so, as many carers are also unaware of tax laws and the employer bears full responsibility for tax liabilities.
So, how exactly do you correct the previous year’s payroll and figure out how much back or back taxes you owe for wages you paid under the table to a household employee?
How do I know if I owe domestic work taxes?
For tax year 2023, household employment taxes, or nanny taxes as they are commonly called, apply when a family pays any household worker $2,600 or more in a calendar year (or $1,000 or more in a calendar quarter for insurance taxes unemployment).
How do I cover nanny or domestic worker taxes?
If you have a household employee, you may have to pay back taxes (Social Security, Medicare, and unemployment insurance taxes), together with penalties and interest.
How much will domestic worker taxes cost me?
As the employer of the household, you are responsible for paying taxes until your nanny or caregiver’s first day of work. Depends the state you live in, employer payroll taxes typically cost about 10% of wages paid. However, if you hired a nanny or carer so you could work, tax breaks can help offset these costs.
To find out what the taxes should be, enter the wages you paid your carer (the net pay) in payroll calculator.
If you find yourself withholding taxes on wages paid in the past, your employer’s payroll taxes will be higher – typically ~18% – as household employers typically choose to pay a portion of employee taxes and put their workers to pay the difference when they apply although some families choose to cover the full cost of back taxes. There are other ways to deal with this situation, and penalties and interest may also apply.
Note: If you are dealing with back taxes for previous years, both you and your carer must amend your personal income tax returns to embed the customizations.
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What can happen if I don’t catch up and pay taxes?
Whether you choose to pay your caregiver off the books or misclassify them as an independent contractor, you could be accused of tax evasion. High-level professionals such as doctors, government officials or lawyers are also at risk of jeopardizing their professional licenses or careers.
“It doesn’t take much to make a family wish they had paid legally,” says Tom Breedlove, Sr. Director of Care.com HomePay. “An unemployment claim or wage dispute from a disgruntled employee or perhaps a workers’ comp claim and the family is besieged by tax and legal issues.”
At a minimum, if your tax returns are audited by the IRS, you will be required to file late tax returns, amend your personal income tax return, and pay any back taxes you owe, along with any penalties and interest.
How do I pay back taxes?
You sure can pay taxes yourself, as well as filing the necessary state and federal forms and even appealing yourself. But you can also choose to hire a service, such as Care HomePaywho is familiar with the whole process and can undertake all the work for you.
“The IRS estimates that the average family can expect to spend 55 hours a year handling federal and state household employer obligations,” says Breedlove. “Each family can choose for themselves if it’s something they can manage or if they’d rather have experts step in and take full responsibility.”
If I get caught on my tax returns, are there any tax breaks I can take advantage of?
Yes, book-paying families can get tax relief in the form of dependent care tax credits — either Dependent Care FSA through their employer or Child and dependent care tax credit (Form 2441). “These tax breaks can offset most – if not all – of the employer’s tax costs,” says Breedlove. “But they’re only available if you can show the wages were reported to the IRS.”