Figuring out nanny taxes and payroll for your clients with household help can be a hassle, not to mention time-consuming. But you need to keep your clients compliant so calculating nanny taxes “after the fact” may seem to be a way you could save time and energy that can be spent elsewhere. However, there are big risks involved when going this route.
What is 'after the fact?'
Instead of running payroll and calculating withholdings each pay period, a client would provide wage data at the end of a quarter for you to figure out tax obligations and remit that amount at the quarterly estimated tax deadlines. This would include FICA taxes (Social Security and Medicare), unemployment, and possibly employee income taxes (withholding income tax is not a requirement for household employers).
Your client may prefer this method as they can simply write a check or pay cash, as they have always done, and not worry about much else. While “after-the-fact” taxes may seem easy, a lot can go wrong for you and your client.
Wage violations
One of the biggest issues with “after-the-fact” nanny taxes is falling out of compliance with tax and wage laws. Is your client paying at least the applicable minimum wage (highest of the federal, state or local rates) for an hourly rate? Are they paying time-and-a-half for overtime?
When you receive the wages paid for the quarter, you may not know hours worked each week to determine if your client has been paying their employee properly. It could lead to wage violations, tax audits, paying back taxes with penalties and interest, and exposure to legal action from their employee.
Household employers are typically high-net-worth families, which can make lawsuits appealing for domestic workers.
Poor timekeeping
To avoid wage issues, you ask your clients for timesheets so you can be sure minimum wage and overtime rules are being followed. But they are busy professionals — that’s why they need household help in the first place — and may do a poor job of tracking their employee’s time. When they give you timesheet information, there could be a fair amount of guesswork involved. Now you are left putting together payroll reports and submitting tax forms based on inaccurate records.
Bad timekeeping may also lead to wage violations and more trouble for your client.
Labor law non-compliance
Beyond tax and wage regulations, household employers also have labor laws to follow. Several states and cities have Domestic Workers’ Bills of Rights that may determine how often an employee gets paid, require paystubs, and establish days of rest and paid time off among other protections.
Paid sick and family leave programs — like those in New York, Massachusetts and other states — may require household employer and/or employee contributions. Labor law compliance gets missed when it becomes a matter of simply looking at wages and taxes leading to problems with state labor agencies.
Lack of workers’ compensation coverage
Workers’ compensation insurance is required for household employers in many states and can be overlooked or skipped. Even if your client is trying to follow the law, mistakes can be made.
All it takes is one week for a household employee to work the necessary hours for workers’ compensation to be a requirement. Let’s say your client’s nanny works 35 hours per week and workers’ comp is required at 40 hours. Your client decides against having coverage. But one week they need their nanny for some extra hours, they hit the 40-hour mark, and workers’ comp becomes mandatory.
If payroll is not accurately tracked, this could easily get missed. Your client could owe medical costs and lost wages if their employee gets hurt on the job and a workers’ comp policy is not in place. That would be on top of fines and penalties for lack of coverage.
Tax deadline scramble
Tax deadlines are already hectic. Why add the stress of getting sloppy payroll data — probably at the last minute — and trying to calculate taxes? It would be very easy to rush through it and make mistakes that could cause issues for your client.
Impact on your firm
“After-the-fact” nanny taxes can lead to financial and legal consequences for your clients. Poor payroll records may result in fines, penalties, payment of back taxes with interest, and possible legal action by an employee.
But what about your firm? Can you be at fault too?
A client may blame your firm for getting their nanny taxes wrong even if they supplied the bad data. However, they expect expert advice from your firm and to be steered away from any trouble. You could jeopardize the client relationship — and even lose the client altogether — over the mishandling of nanny taxes or incorrect guidance. Household employers are usually wealthy families who may be doing a lot of business with your firm. You would not want to lose them over nanny taxes.
How to handle nanny taxes the right way
It is much easier to handle nanny taxes each pay period rather than at the end of the quarter. That way you can stay on top of payroll data and resolve any tax and wage issues right away, keeping your client compliant and happy. When it comes time to file your client’s estimated household employment taxes for the quarter, you have confidence in the payroll information and the amounts you are remitting to the IRS.
