I don’t know if I should be so excited about this, but kudos to the IRS…
We’re paying one of our mother’s helpers more than the maximum for under-the-table income. Because I might someday be appointed to government office (and also because I was “brought up right” and am naturally a rules follower) that means I have to figure out the whole nanny tax thing.
The calculations for taking money out of the paycheck hurt my head, so we’re going to figure all of that out later.
However, the first step is to fill out an SS-4 to request an Employee Identification Number (EIN). The form is really icky and hard to understand. But! Now the IRS has an online version that asks a few questions and makes it super super easy!
So yay easy!
Still not looking forward to the I9 and W-whatever and actually paying the taxes and so on, but any streamlining is appreciated.
Have you paid the “nanny tax” before? Any tips?
November 19, 2012 at 7:19 am
Once you’ve completed your SS-4, you can called a phone number and they’ll have you fax the form to them, and you can get the EIN while you’re on the phone to them. If you have some time to sit on hold, and if you have a fax machine handy. The phone number to call is in the instructions.
November 19, 2012 at 7:29 am
The online version I link to is way easier than that. It asks a few questions, fills out the form for you, and instantaneously gives you an EIN.
November 19, 2012 at 10:23 am
Huh. Guess we should try using that then :)
November 19, 2012 at 7:51 am
My hint is signing up for a free trial of Inuit payroll services to check your spreadsheets if you’re doing it yourself. That’s how I could check if I had all the many extra CA taxes done correctly. I was seriously considering hiring a part-time nanny this year, but paying the nanny tax would mean spending more than half my salary on childcare. Even for 20 hours a week. So we went with daycare. Sad since she was like Marry Poppins.
November 19, 2012 at 8:47 am
Am I right that this IRS rule applies to more than just nannies? How does one know if/when to do this? For example, I have a dogwalker who sends me an invoice every month with his company name on it. However, I’m asked to make payments to him by name. So am I breaking the law?
November 19, 2012 at 9:00 am
It does apply to other personal workers. Your dogwalker is probably a contractor, so you’re probably ok. There are a bunch of rules (you can find on an “about.com” website), but one of the main things is: do they bring their own stuff or do they use your stuff. Another big thing is how much do you pay in a calendar year– if it is under a certain amount you’re ok ($1,800 in 2012).
November 19, 2012 at 9:27 am
We used GTM, which does both small business and household payroll services. They filed for us get an EIN (I agree, the form was scary and probably is the first thing that needlessly deters a lot of parents off paying legally). They set everything up, and withhold all taxes and transmit them, pay employees by direct deposit, give us tax forms at end of year and deal with various state departments of labor as the need arises. This costs about $60/month ($600/year in advance, I think) for these services, then it’s like $15/month for any additional employee (so if you ever added a housekeeper or a second nanny or whatever). As many businesses discover, hiring the first employee is a PITA. Hiring the second is a breeze – just need the I9 and W4 and you don’t really even have to send those anywhere, just record the info into the payroll system, and keep the originals on file. If you’re hiring a full-time employee, using a professional payroll service is likely a drop in the bucket, and I think worth it in terms of time saved and peace of mind.
November 19, 2012 at 9:44 am
That’s good to know about how much the services cost– thanks!
For us, $600 is a sizable markup on what we’re paying the student, and we’ll be starting daycare after that. I’m guessing the time DH spends on this over x-mas break will come out to less than $600 at his hourly wage, especially given how easy the EIN turned out to be (yay online form).
November 19, 2012 at 10:05 am
I haven’t. I agree that the tools they’re providing to the public as time goes on makes DIYing all this stuff so much easier. Yay for the internet. I don’t actually HAVE to get a CPA now.
November 19, 2012 at 12:40 pm
I Hardly know what you’re talking about here, except for one thing. Easy IRS stuff! Every year my wife an dme try to figure out our taxes and it’s just so complicated. It shoudln’t be, but it is. So the fact that you found some easy online form thingie for your nanny situation is awesome. Awesome!
November 19, 2012 at 7:26 pm
We’ve done this for 2 babysitters; and we’re getting close to $1800/yr on sitter #3. We self-prepare all of it, and we used the same EIN that I already had for one of my businesses (apparently the IRS likes peeps to use as few EINs as possible). A federal tip – the calendar year salary count begins once the employee who is not your dependent reaches 18 years of age. Also, the I-9 is a form that goes to live forever in your filing cabinet and probably nobody will ever look at it (right up until that Senate confirmation hearing, of course.) Fill it out, file it away, and forget about it. Make sure you give the employee their W2 by the deadline each year, ideally shoot for mid-January.
In my state (WA), payroll taxes need to be filed quarterly, and it is super easy to do via their awesome online system called EAMS. They are helpful over the phone, too.
More people know when they need to be paying taxes on babysitters/nannies; but it’s the failure to pay taxes on housecleaners that can get folks in trouble. One rule of thumb, if you’ve been writing the checks out to an individual cleaner instead of to an incorporated cleaning business (such as Cleaners LLC, Clean House Inc), you should seriously re-assess your decision not to file taxes on the person.
Finally, don’t ever hire someone who asks you to pay them under the table. To me, it’s a character issue. I feel pretty strongly that one thwarts the IRS at their peril: they took down Capone, after all. Also, making sure young women have every chance to earn their full 40 credits for SS is the right thing to do, no question.
November 19, 2012 at 7:30 pm
Great advice, thanks!
We only hired housecleaning for a very short time when we were trying to rent out our house, so we didn’t get anywhere near the limit.
November 19, 2012 at 9:19 pm
We haven’t faced this issue or even come close to it, but do believe in “doing the right thing.” Glad to know you are, and that the IRS is helping make it easier to do so — both good news!
November 20, 2012 at 7:33 pm
For me, getting the EIN was the least of difficulties. Filing the quarterly everything is the tricky part. So as I did this the first time, I made myself a step-by-step list that goes like this:
***
1. Fill out and mail in UC-2 (state unemployment compensation form). Photocopy it.
2. Telefile a W3 form.
- Calll 800-748-8299.
- Q: sales tax or EMPLOYER WITHHOLDING?
- Q: file what? QUARTERLY W3, WITH OR W/O PAYMENT
- enter 8 digit PA Acct # (my number here)
- enter EIN (my number here)
- file for period just ended
- enter compensation (w/ cents), then #
- enter tax w/held
- enter total deposts
- stay on line to receive confirmation #; record it in my sheet.
> done! <
****
Having this little checklist seems to help speed up the process of getting ready for the 4-times-a-year accounting hoops.
November 20, 2012 at 7:38 pm
wow! That’s really useful!
We don’t actually have to do the quarterly stuff because A. we’re under the limit, and B. it’s two quarters– one before the tax deadline and one after.
November 20, 2012 at 8:36 pm
Lucky you! (Says one who knows).
November 26, 2012 at 1:43 pm
[...] from Nicole and Maggie: Grumpy Rumblings presents Sometimes the IRS is awesome, and says, “Nicole and Maggie discuss how to get an employer identification number (EIN) and [...]