How to Keep on Top of Taxes for Household Workers During COVID-19

In the household employment industry, the COVID-19 pandemic is crystallizing the importance of legally paying employees. As a tax professional, here's what you need to know to help your clients stay compliant.

May 27th 2020
Founder and CEO GTM Payroll Services
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While millions of Americans lost their jobs due to the health crisis and claimed unemployment benefits (including the extra $600/week from the CARES Act), many nannies and other household workers were left behind because they were paid “under the table” and couldn’t use a safety net that many of us take for granted.

Household employees paid off the books were also cut out of paid medical and family leave benefits afforded under the Families First Coronavirus Response Act (FFCRA).

While it may have taken a global pandemic to bring home the consequences of illegal pay, it’s not too late for families to get caught up on their nanny taxes so their employees can take advantage of unemployment and paid leave benefits. Some workers may apply for unemployment anyway – even if they are not eligible – and that could lead to fines and penalties for your clients.

Also, legal pay will entrench itself in the “new normal” as more and more nannies and household workers see the advantages afforded by “on the books” pay versus the relatively small amount taken out of their paycheck for taxes. So where does that leave your clients who haven’t been compliant with nanny tax and payroll laws?

The delayed deadlines for filing 2019 tax returns as well as Q1 estimated taxes caused by the pandemic means they could get caught up without incurring fines, penalties, and payment of back taxes with interest. Setting up for legal pay will also help your clients avoid these issues going forward.

While the economy is slowly re-opening and families consider resuming household help, the virus has not gone away and there is still a chance an employee can get sick. FFCRA paid leave can be taken through the end of the year and unemployment insurance now extend for 39 weeks. Legal pay will help household employees obtain these benefits should they get sick or lose their job in the coming months.

Current Household Employers and Getting Caught Up

If you are handling nanny taxes and payroll for your clients, then you are likely current with their tax and wage compliance. However, now is a good time to check in with your other clients that may have hired someone without informing you or have been trying to manage such taxes on their own.

Without contributing to unemployment taxes, your client could get caught for non-compliance as their worker will need to list their previous employers when filing for benefits. That could result in a call from their state’s labor agency about avoiding their tax obligation.

Also, household employees are eligible for paid sick and family leave under FFCRA. This federal law lets employees take paid time off work due to reasons related to the pandemic, including caring for themselves, other family members who are sick and children who cannot go to school or daycare because of facility closures. Employers get a dollar-for-dollar tax credit for any paid leave taken under FFCRA.

With the extension of unemployment benefits under the CARES Act and paid leave benefits running through the end of the year, it is smart for families to get compliant now with their nanny tax obligations so their employees can take advantage of these programs. The filing date for estimated taxes for the first two quarters of 2020 is July 15, the same deadline for 2019 tax returns.

If they haven’t already, they’ll need to get a federal employer identification number (Form SS-4), which can be obtained online, file a new hire report, and set up an unemployment insurance account with their state. There are several steps to take to avoid the risks of non-compliance.

Your client will owe 15.3 percent of their employee’s gross wages in FICA taxes (Social Security and Medicare), six percent on the first $7,000 in gross wages for federal unemployment, as well as state unemployment, which will vary by state.

Half of the FICA tax amount (7.65 percent) could be paid by the employee. When catching up, it may make sense for the family to pay the entire amount rather than withholding what could be a significant sum of money from their employee’s pay.

The employee may owe federal, state, and/or local income taxes on their gross wages. Going forward, it is reasonable to deduct the employee’s share of FICA taxes from their paycheck.

Catching up on nanny taxes may take some time and money to fix. But continuing to ignore the problem will only increase compliance issues that have been further exacerbated by the pandemic.

New Household Employers and Getting Started

With the economy opening up and parents going back to the office, many families may rethink their childcare options. They could prefer hiring a nanny for in-home care rather than sending their children to daycare centers or summer camps where the risk of catching and spreading the virus may be greater. Again, these families will need to follow the steps to become an employer and start legally paying their nanny.

Final Thoughts

The COVID-19 pandemic has left a significant impact on our lives that will be felt for years to come. In the household employment industry, the pandemic has pushed legal pay to the forefront. Now is time to check in with your clients, catch up on their nanny taxes, and get prepared for a future where legal pay will no longer be ignored.

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