The recent release of Donald Trump’s 2005 tax return has been getting a lot of attention. Everyone is looking at the larger numbers, but we’ve noticed what’s not on the return. Look at line 62 on page 2 of the 1040. This is where the Schedule H information would be seen if President Trump had paid household employment taxes (the so called “nanny taxes”) with his personal tax return. This number would show the amount of tax he paid on the salaries of his household staff. With a household staff as large as his, one would expect that number to be substantial.
Does the blank line mean President Trump didn’t pay his nanny taxes?
Not necessarily! There are actually several ways that high net worth households like the Trumps can properly pay their household staff and employment taxes without using a Form 1040 Schedule H.
The ultra rich often utilize an entity called a family office to manage their households. These companies serve as a sort of back office for either one particular family (often multigenerational) or several family clients. In this model, Mr. Trump’s household staff could be employees of the family office and not Trump personally. This arrangement would exclude Mr. Trump from having to file a Schedule H while ensuring the staff was employed legally. Similarly, employing household staff through a trust, Limited Liability Company (LLC) or other corporate entity would explain why no Schedule H was filed.
So why would Mr. Trump choose to employ his staff indirectly?
Generally speaking, household employment rules apply to the family regardless of how the domestic workers are technically employed. The key is who directs the work to be done. In almost all of these situations, the family ultimately directs the work and would be subject to the household employment rules, including wage and hour laws. That said, some high profile families still choose to organize an entity for employment of domestic workers for ease of administration, insurance reasons, and to avoid any publicity associated with legal proceedings related to employment.
The Form 1040 Schedule H is actually the easiest way for a “regular” household to report and pay their household employment taxes for their nanny, housekeeper or senior caregiver. If you aren’t in the Trumps’ league and don’t have “people” to manage life’s details like this, it may be time to make sure you are right with your nanny taxes. HomeWork Solutions works with families just like yours nationwide, and can make your nanny tax compliance process effortless.