Nanny Tax

David Cay Johnston recently posted an article on the Nanny Tax. This is a tax that, honestly, most people do not know about. This is the payroll taxes that each of us owe if we hire someone to come work in our home. Such as a house cleaner. Or a regular baby sitter or someone to watch our children. Or the gardener that cares for the lawn.

Yeah, payroll taxes.

The tax does not require the complicated payroll tax forms (e.g., Form 941) but instead is paid with our regular federal income taxes using Schedule H. But it is not exactly trivial to fill out.

The compliance rate? Pretty small numbers. And one of the more difficult items to catch as well.

The downside? There are a lot of people who will not see much, if anything, from Social Security. When Schedule H is not filed, then there is no employment record for the person who did the work. So no unemployment benefits. No disability protection. No retirement benefits. No survivor benefits.

A few years ago the IRS ran a study where they audited 45,000 tax returns for the Household Employee, or nanny. They found $12 million in unpaid taxes. They also found $11 million in over-paid taxes. That generated some nice refunds.

Recent law changes increase the filing requirements related to this. Thank you Health Care. But the best I can offer here is if you do pay someone on any regular basis to do work at your home, discuss this with your tax professional.