Your clients with household help — such as nannies, housekeepers and senior caregivers — may be paying their workers through a mobile app like Venmo or PayPal. It’s quick and easy, but thanks to a new tax-reporting rule, it may no longer be a good idea.
What’s new this yearUnder the American Rescue Plan Act (ARPA) passed in March 2021, paying for goods and services — like babysitting or childcare — through third-party settlement organizations (like Venmo, PayPal and Cash App) will be reported to the IRS if those transactions total $600 or more in a year.
The idea behind the requirement is to make more transactions reportable so it is harder for businesses to underreport their taxable income by using apps to get around banks and other traditional forms of reporting income.
While the intent of the rule is aimed at businesses, household employers and their workers need to understand the implications.
If a household employee exceeds that $600 threshold for payments made by mobile apps, they will get a
Form 1099-K is an IRS informational tax form used to report payments received by a business or individual for the sale of goods and services that were paid via a third-party network, often referred to as a TPSO (Third-Party Settlement Organization) or credit/debit card transaction. The IRS requires TPSOs, such as PayPal and Venmo, to issue a Form 1099-K, which shows the total amount of payments received from a TPSO in the calendar year if a customer meets the $600 threshold amount.
It has always been a requirement to report income when net earnings from self-employment exceed $400. ARPA just broadens the reporting of tax information to the IRS.
This rule went into effect on Jan. 1, so the personal tax returns due this April will not be affected.
How to advise your clients
Your clients with household help should avoid using mobile payment platforms to pay their workers.
Receiving a 1099-K at tax time will cause confusion as nannies and other household workers should receive a Form W-2. Your clients may also fall out of compliance with domestic worker protection laws in their state that may call for pay stubs to accompany their workers’ pay. Using a mobile app for payment and skipping the required paystub could be a labor law violation.
The best ways for you or your clients to pay their household employees are through direct deposit or with a paper check.
Clients paying 'off the books'
You may have clients with household help who are paying their employees “off the books” to avoid employment taxes and wage and labor laws. Previously, paying a worker under the table through a mobile app did not leave much of a paper trail and may have been a viable method to illegally employ a nanny. Now, the new tax-reporting rule adds mobile app payments to a growing list of ways a client can get caught illegally paying their nanny.
Household employees should always be paid “on the books” to avoid significant fines and penalties when paying illegally and for the benefits and protections provided to workers.
With mobile app payments now closed off to illegal work arrangements, now may be a great time to get those clients paying their employees legally either through your firm, on their own, or through a payroll service.
Understandably, you likely do not know about these clients so you may need to inform your customer base, or the families you know with young children who may employ a nanny, about the new tax-reporting rule and the implication it has on “off the books” pay.
Paying a babysitter
Paying the occasional or date night babysitter is different from employing a nanny. A babysitter has irregular hours and may not make more than the nanny tax threshold ($2,400 in 2022). It may still be OK for your clients to pay babysitters with a mobile app. But those childcare providers should know this income will likely be reported to the IRS and would need to be reported on their personal tax return.
If your client’s babysitter is frequently paid through a mobile app, they may be asked to provide their Social Security Number or Individual Tax ID Number to continue using that platform and be paid for their services.
The IRS will be able to cross-reference both the third-party network report and the one issued to the babysitter.
Using 'personal' transactions to pay for services
Since the new reporting rule only applies to payments received for goods and services, why not just pay a babysitter or nanny as a personal transaction as if they were a family member or friend?
When using PayPal or Venmo, users can tag their transactions as either personal (when reimbursing or gifting friends and family) or goods and services (when purchasing an item or paying for a service).
Paying back a friend or sending money to a family member as a gift is not subject to the new tax-reporting rules.
However, if a client is paying their babysitter or nanny on a consistent basis, those regular transactions will raise red flags, and the payment platform may call into question whether they were truly made to a family member or friend. PayPal, which also owns Venmo, says it will monitor accounts to ensure that personal payments are not being used for sales of goods and services. If using a mobile app, your clients should always pay their babysitters as service transactions.
