1099ing A Nanny - Case Study

Posted by HomeWork Solutions on 10/18/22 11:00 AM
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One of our HomeWork Solutions Representatives shares the story of a client who issued her nanny a 1099 form, and later found herself on the wrong side of the IRS.

Our client, Sarah H. came to us when her relationship with her nanny was in crisis over taxes. Sarah lives in New Jersey, and she hired her nanny in the fall and was paying her in cash every week. She has an accountant to handle her income taxes, and when she hired the nanny, her accountant told her that nannies could be paid as independent contractors.

Background

Sarah is the first to admit that she doesn’t understand taxes and prefers not to deal with them. In her circle of friends, all the families pay cash to their nannies. After checking with her accountant, she felt very comfortable with this arrangement. Sarah and her husband, however, were enrolled in a Dependent Care Account and had contributed $5,000 of “pre-tax” money to help with their childcare expenses. To get reimbursement for their nanny’s pay, they needed to provide the nanny’s Social Security Number to the plan administrator.

In January, Sarah’s accountant helped her prepare a 1099 form to give the nanny, and that is where the trouble began. The nanny went to a free tax clinic run by the IRS’ Volunteer Income Tax Assistance program. After chatting with the volunteer about her job, the tax preparer advised the nanny that her employer had likely misclassified her as an independent contractor, and that IRS guidance states that nannies are employees and should receive a W-2 form. Moreover, the volunteer showed the nanny that the misclassification would cause her to owe an additional $2,300 on her income tax return.

Challenge

The volunteer tax preparer was correct. Nannies are employees and should receive a Form W-2 at the end of the year.

Sarah was confused about the distinction between an employee and an independent contractor. She did some internet research and then contacted her accountant. Her accountant suggested that Sarah talk to some of the experts at HomeWork Solutions to better determine the correct classification for her nanny. So, Sarah called us and received a quick education on why this was important and what her responsibilities were as an employer. HWS explained that misclassification is common, and the distinction between employee and an independent contractor is important because employers of household employees file and pay employment taxes. Contractors have more flexibility in how and when they do their job and may even send in substitute workers when needed. They are also responsible for their own tax filings. Unfortunately, Sarah’s accountant had originally steered her wrong, and there was some catch up she needed to do to straighten things out.

Solution

It was fortunate that Sarah’s nanny had only worked for her for a short time.  HWS helped Sarah to understand what taxes she needed to pay. Sarah worked with HWS to help her get caught up on the taxes and signed up for HWS’ payroll services so this could be done effortlessly going forward.

Outcome

Since she began working with HomeWork Solutions, Sarah has not had a single problem. This provides a sense of relief when tax time comes around for both her, and her nanny. In addition, Sarah’s nanny is happy with her direct-deposit payroll, a convenience she has never had before working as a nanny.

Topics: nanny, agency, CPA

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