Helping families and their nannies get their payroll and taxes squared away is really only half of what we do at HomePay. The other half is education and outreach – staying on top of ever-changing law and sharing that information with families and caregivers. Our education and outreach goals have always been to help both parties stay out of trouble and save as much money as possible while making sure that caregivers get the benefits and protections they deserve.
And by far the topic we end up explaining more than any other is why a nanny should receive a W-2 rather than a 1099. The IRS has ruled consistently that nannies are employees of the families for whom they work and all wages should be reported using Form W-2 (Form 1099 is for “independent contractors” or those who are self-employed). It doesn’t matter how many hours a week she works, how much she is paid or what she is called in a work agreement. She is an employee of the family and, therefore, the family has some “nanny tax” obligations.
Some families try to short-cut those obligations by misclassifying their worker as an independent contractor and giving her a Form 1099. And recently, the Department of Labor (DOL) has taken notice and is working with state tax agencies to catch instances of worker misclassification. Specifically, $10.2 million in grants are going to the states of California, Delaware, Florida, Hawaii, Idaho, Indiana, Maryland, Massachusetts, New Hampshire, New Jersey, New Mexico, New York, Oregon, South Dakota, Tennessee, Texas, Utah, Vermont and Wisconsin to enhance enforcement of the law.
You may be wondering why the government is doing this. The answer is that when nannies are “1099’d,” it specifically takes tax revenue away from the federal and state unemployment insurance pool because independent contractors don’t have to pay unemployment taxes. The government sees a large amount of uncollected tax revenue and they want it.
So how does this impact nannies? When a nanny is misclassified as an independent contractor, they don’t have access to unemployment benefits if they lose their job. Additionally, a nanny who is misclassified has a much higher tax burden because they have to pay both the employer and employee portions of the Social Security & Medicare taxes. (For reference, a misclassified nanny earning $40,000 per year would have to pay an additional $3,000 in taxes!). These two details are things many families and nannies don’t understand when they mistakenly go the 1099 route. In the end, it’s safer for the family and better for the nanny to handle payroll correctly.
If someone you know is currently being 1099’d, please pass along this information to them. It isn’t meant to scare anyone, but rather inform them that they’re losing a lot of money in taxes and that their families may find greater scrutiny from their state tax agency. And let them know there are nanny tax specialists like HomePay by Breedlove that can make everything effortless for families. We also offer free consultations to explain the law, run budgets and answer questions. Families that have been misclassifying their nanny this year still have time to get things corrected before their income tax returns have to be filed.
If you’d like more information about worker misclassification, please visit our website or give us a call. We’re here to help.