Case Study: 1099ing the Nanny

HWS' Client Care Manager, Mary Crowe, 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, Linda M. came to us when her relationship with her nanny was in crisis over taxes. Linda 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 everyone treats their nanny as an independent contractor.

BACKGROUND

Linda 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. After checking with her accountant, she felt very comfortable with her arrangement. Linda and her husband, however, were enrolled in a Dependent Care Account and had contributed $5000 of “pre-tax” money to help with their childcare expenses. In order to get reimbursement for their nanny’s pay, they needed to provide the nanny’s Social Security Number to the plan administrator.

In January, Linda’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 preparer showed the nanny that the misclassification would cause her to owe an additional $2300 on her income tax return.

CHALLENGE

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

Linda was confused about the distinction between an employee and an independent contractor. She did some internet research and then contacted her accountant. Her accountant explained again that everyone calls their nanny an independent contractor, even though they really are employees.” No one wants to deal with the nanny taxes” he explained, “but if you do I suggest you talk to HomeWork Solutions.”  Linda called HomeWork Solutions and received a quick education on why this was important and what her employer responsibilities were. HWS explained that the distinction between employees and contractors is important because employers of household employees such as nannies file and pay employment taxes. Contractors handle their own tax filings. Linda’s accountant had steered her wrong, and there was some catch up Linda needed to do to straighten things out.

SOLUTION

It was fortunate that Linda’s nanny had only worked for her for a short time.  HWS helped Linda to understand what taxes Linda needed to pay. Linda engaged 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. Linda agreed to pay her employee’s portion of the Social Security and Medicare taxes – an option available to household employers. Linda convinced her nanny to allow HWS to do paycheck deductions for her income taxes to help her avoid the stress of a large tax bill in the spring.

OUTCOME

Since she began working with HomeWork Solutions, Linda has not had a single problem and she credits this with providing her a sense of relief when tax time comes around. Linda’s nanny is delighted with her direct-deposit payroll, a convenience she has never had before working as a nanny.

Related Links:

How A Nanny Addresses Pay on the Books With Her Family

7 Reasons You Should Be Paying Your Nanny Taxes

Unemployment Insurance: A Nanny's Safety Net