When families hire a household worker, such as a nanny or senior caregiver, they often don’t realize that paying taxes are part of their responsibilities as an employer. If you are one of these folks who was not aware of tax and payroll laws — or even if you were aware, but now realize the benefits of paying on the books — don’t worry: We’ll explain the six steps to transition from paying under the table to on the books.
- Calculating the taxes owed
- Deciding how to cover taxes
- Talking to your employee about taxes
- Correcting past tax mistakes
- Amending tax returns if necessary
- Getting help if you need it
1. Start calculating taxes owed from day one
Because the IRS says you need to account for your caregiver’s taxes from the first dollar they earn, you’ll need to go back to their official start date. Whether that’s three weeks, five months or even two years ago, begin planning on how you will cover the taxes you’ve missed. You can use our paycheck calculator to plug in what you paid your caregiver (the net pay) and see what the taxes should be for that amount. Going back in time requires a little more work, but not doing so leaves you at a higher risk if you’re ever audited by the IRS.
“You never know when the IRS could ask to scrutinize your tax returns,” says Tom Breedlove, Sr. Director of Care HomePay. “And if for some reason your caregiver were ever to file a wage dispute — whether legitimate or not — it could uncover your failure to pay employment taxes.”
Keep in mind that if you’re going back to previous years to account for taxes, both you and your caregiver will need to amend your personal income tax return for those years to account for the changes.
2. Decide how taxes will be covered
Since taxes weren’t withheld from your caregiver, they need to be paid. Some families ask their employees to pay a portion of the amount owed while other families might decide to absorb the cost of the back taxes completely. Whatever decision is made, make sure your caregiver understands that you’re using the money to pay taxes on their behalf and, that going forward, they will see the money come out of their paycheck.
3. Talk to your caregiver about how taxes and payroll work
If your caregiver isn’t used to having taxes taken out of their paycheck, you should talk about what future paychecks will look like. Use our tax calculator to show them the exact breakdown and explain that their pay also factors in several important benefits. If they ever need to file for unemployment or hope to receive Social Security, being paid on the books gives them a way to access these benefits.
4. Begin correcting your tax mistakes
After you talk to your caregiver about how payroll will work moving forward, apply for state and federal tax identification numbers so you can file any previous tax returns you’ve missed. If you’re still within the calendar year, you’re only late on paying state tax returns. Federal taxes are sent to the IRS using the estimated tax payment schedule, but it’s not mandatory to adhere to it. However, waiting until April to send in your federal taxes can result in underpayment penalties, so it’s recommended to send those taxes in as soon as possible.
And penalties incurred for late filing of state taxes can often be waived for first-time household employers, but you must contact your state’s department of revenue and ask about waiving penalties. Subsequent errors are unlikely to be waived.
5. Amend previous years’ tax returns if necessary
If you didn’t take care of your household employment taxes last year, file a retroactive Schedule H with your amended Form 1040X for each year there was an error. Taxes will be due when you file, and you can expect to receive notices from the IRS for the late returns. Penalties and interest may be assessed, but the IRS looks more kindly on taxpayers who voluntarily correct their errors. If you’re ever audited and the IRS notes you didn’t pay some taxes, the penalties might be higher.
6. Get help if you need it
“Families can certainly pay the taxes, file the state and federal forms and even appeal penalties on their own, but it helps to hire someone familiar with the process,” adds Breedlove. “Families don’t always know how to lobby for waiving fees and being on the phone with the IRS for an hour can be intimidating.”
Paying your caregiver legally is great protection for both of you in the long run. Your caregiver gets access to benefits, and you have peace of mind that you’re doing everything the right way.
Your Next Steps:
- Figure out what your caregiver’s paycheck will look like
- Learn about child care tax breaks
- Read more about our nanny tax and payroll service
* The information contained in this article is general in nature, may not be applicable to your specific circumstances, and is not intended to be a substitute for or relied upon as personalized tax or legal advice.
