The Washington Newcomer's Guide to Nanny Taxes

The results of the 2016 presidential election will bring far-reaching changes to Washington. The change of party control means there will be many staffing changes. With approximately 4,000 positions needing to be filled, the Presidential Transition Team will be busy at work vetting nominees for Cabinet positions, as well as political appointees in numerous senior level agency and ambassadorial posts.

Over the last quarter century, many potential officeholders’ dreams have been shattered by failure to pay household employment taxes. Whether you’re considering a cabinet position for 2017 or some other government post, you need to understand the potential problems so you won’t be caught short.

What is the Nanny Tax Issue?
You may be familiar with the term “Nannygate.” The term referred to revelations that derailed two of President Bill Clinton’s choices for attorney general in 1993. Corporate attorney Zoe Baird’s nomination was withdrawn after it became known she and her husband illegally employed two undocumented workers from Peru as nanny and driver for their young child and failed to pay Social Security taxes for the workers until immediately before the matter was disclosed to the public.

Clinton’s next choice was federal Judge Kimba Wood. Within one day after her name was leaked to the press, it was disclosed that she too had hired an undocumented worker, although she had paid the requisite taxes and employed the worker when it was legal.

It is said that nanny tax problems also prevented Caroline Kennedy from entering the race for Hillary Clinton’s New York Senate seat.

What Does This Mean Today?
The higher the office, the closer a nominee’s life is scrutinized. In 2009, Washington Post uncovered the names of 14 public officials who encountered problems or career derailments due to tax or other problems with household employees. Indications are the standards that officials are held to for compliance with these laws are stricter now than in 2009.

Awareness of the problems surrounding nonpayment of household employee’s taxes may be the reason residents of the Washington area are more likely to pay the appropriate taxes compared to people in the entire country. But attorneys who are part of the vetting process for government positions frequently encounter people who claim not to be familiar with the federal and state tax requirements mandated for those who hire household employees.

What Can I Do?
If you’ve previously hired household employees and haven’t paid the proper taxes, it’s probably too late. But if you’re considering running for a high-level government office and are starting or plan to start hiring a nanny for your children, it’s important to comply with the tax laws.

What Do I Need to Know?
Let’s start with the basics. If you paid wages of $2,000 or more to a household employee in 2016, you’re required to pay employment taxes.

Independent Contractor vs. Employee
A question that commonly arises is if a family can consider their nanny to be an independent contractor, use a 1099 form instead of a W-2 and avoid paying payroll taxes. The short answer is your nanny is an employee and not an independent contractor.

These are the criteria for a nanny to be considered an employee:

• The services were provided in your private home or someone else’s private home as part of a nanny share.
• You paid the household worker $2,000 or more.
• The household worker is at least 18 years of age.
• Household employees must be provided with a Form W-2.

Why is a Nanny an Employee?
The key to understanding the criteria that defines a nanny as an employee is that you have the right to control her work. You decide how she’ll spend the day with your children. She follows your rules and disciplines your kids according to your parenting strategies. You control her working hours and the places she goes with your children. You provide the supplies she uses during her job, including everything from diapers to snacks.

Why Isn’t a Nanny an Independent Contractor?
An independent contractor typically comes to the home when work needs to be done. Think of a landscaper who comes to your home to cut the grass periodically. The landscaper brings his own equipment and makes decisions as to how the work will be performed. An independent contractor can decide who works for them and who can fill in for them if necessary.

These are some examples of why a nanny isn’t considered to be an independent contractor:

• She follows your instructions regarding what she can and can’t do while she’s caring for your children.
• She works a regular schedule you’ve specified.
• You’re in charge of finding a replacement for her if she can’t make it.

What Happens if I Classify My Nanny as an Independent Contractor?
You need to know this is illegal. It’s called “Employee Misclassification” and the government is cracking down on violators. These are a few points to consider:

• Filing taxes for household employees incorrectly is considered tax evasion by the IRS.
• Your nanny will end up paying more taxes by filing as a contractor.
• Your nanny will be unable to qualify for government benefits such as unemployment insurance
  

Those seeking a government security clearance should take note. Form: SF86, Questionnaire for National Security Positions, contains the following question: “In the past seven (7) years have you failed to pay Federal, state, or other taxes when required by law or ordinance?” A false statement on this form not only disqualifies one from consideration for a position, it is a felony under U.S. Criminal Code (title 18, section 1001).

A Final Word
Failure to pay proper taxes for your nanny can do more than invite legal trouble. If you work for the government, it can be a potential career killer. With so much at stake, why jeopardize it by making a costly error? As with all tax matters, it’s always best to seek the help of a qualified professional who can help you prevent problems and keep you out of trouble.