Venmo, PayPal, and CashApp are popular and convenient apps for making payments electronically. However, if you pay your nanny or other household staff through one of these cash apps, you should be aware of a new tax reporting rule that could impact you and your employees.
The New Tax Rule
The American Rescue Plan Act (ARPA) instituted a new rule: if you pay more than $600 per year for services like childcare through third-party settlement organizations such as Venmo and PayPal, it will automatically be reported to the IRS. The rule, which went into effect in January of 2022, means your nanny or caregiver will receive form 1099-K for the 2022 tax year. The goal of the ARPA was to clamp down on people that are using the apps to avoid reporting taxable income. Instituting this rule allows the IRS bring these payments to light and get employers paying on the books.
Avoiding Issues with Mobile App Payments
The best way to avoid any concerns about mobile app payments is to properly classify workers as household employees and provide them with proper legal documentation for their work. The federal government has always held that domestic workers are by definition of their work, the employees of the families they work for. All household employees should receive a W2 at tax time—your employee is not an independent contractor and therefore should not receive a 1099.
Paying your employee legally is not only a requirement of labor and tax law; it’s simply the right thing to do. This gives employees access to unemployment benefits, social security, and social service programs when needed. In addition to federal laws, many states and localities have instituted domestic worker protection laws requiring families to issue paystubs showing all taxes withheld, details about hours worked, overtime pay rate, and more. Paying a nanny through a mobile app would not fulfill these requirements and leave the employer out of compliance with these labor laws. The best way to ensure all payments are legal and documented is through a check or direct deposit, accompanied by a pay stub.
If you’re unsure how to withhold taxes from your nanny’s paycheck, remit those taxes to tax authorities, and stay in compliance with labor and tax laws, the experts at HomeWork Solutions can help! We offer free consultations, so you can have the information you need to do things the right way. Our payroll services ensure taxes are deducted and filed correctly so there will be no surprises later. We’ll get you registered with the IRS and state tax authorities, and make sure your nanny is paid accurately. We have flexible, customizable service plans, so you can find the one that’s right for you.