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The "Nanny Tax"--Revisited
Many years ago, the "Nanny
Tax" was a much- publicized issue when several cabinet-level
nominees were found to have ignored the tax laws associated with
household employment. Just recently, another individual nominated for the
President's cabinet was found to have not properly filed returns and paid
taxes associated with his household help--although this tax matter proved
to be just one of several issues that undermined his appointment. The
following is a discussion of the various aspects of the "Nanny
Tax" rules.
For starters, the "Nanny Tax"
isn't limited to a nanny- -it also applies to a housekeeper, maid,
baby-sitter, gardener or other household employee who isn't an
independent contractor. (Of course, you must first confirm that such an
individual is legally permitted to work in the US.) If you employ someone
subject to the Nanny Tax, you aren't required to withhold federal income
taxes--you would only withhold such taxes if requested by the household
employee and you agree to do so. (Under such circumstances, you should
have the employee complete and sign Form W- 4.) However, you may be
required to withhold and remit social security and Medicare tax (FICA)
and be required to pay, but not withhold, federal unemployment (FUTA)
tax.
FICA. If your nanny earns cash wages
of $1,400 or more (excluding the value of food and lodging) for the year,
you must withhold and remit FICA taxes. If you reach this threshold, all
of the wages (not just the excess) will be subject to FICA. However, if
your nanny is under age 18 and child care isn't her principal occupation,
one need not withhold FICA. Both you and the nanny have an obligation to
pay FICA taxes. As an employer, you are responsible for withholding your
nanny's share of FICA. Furthermore, you must pay a matching amount for
your share of the taxes. When combined, the total FICA amount will equal
15.3% of wages. Instead of withholding, you may choose to pay your
nanny's share of the FICA from your own funds. If you do, your payments
are not considered additional wages for FICA purposes--therefore, you are
not computing tax on the taxes.
FUTA. You also have an obligation to
pay, but not withhold, FUTA taxes if you pay a total of $1,000 or more in
cash wages in any calendar quarter of the current or last year. The FUTA
tax (at a maximum of 6.2%) applies to the first $7,000 of wages paid.
Reporting and Paying. As an employer
of a household employee, you do not have to file any of the usual
employment tax returns, even if required to withhold or pay tax. Instead,
you report your employment taxes on your tax return, Form 1040, Schedule
H. You are required to provide your household employee with a Form W-2 by
January 31, 2005 and with the Social Security Administration by February
28, 2005.
It is extremely important for you to
comply with these rules, and not because you intend to run for elected
office (or hope to be appointed to a political position)! The IRS is examining
taxpayers carefully to determine if such taxes are being properly
remitted.
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Greetings,
Happy New
Year to all! As we approach the first anniversary of our tax newsletter,
we wish to thank everyone for their support and positive feedback. Please
let us know if there is a tax topic that you would like to see discussed
in future issues.
This
month, we discuss some important planning ideas while keeping our eye on
the imminent arrival of another tax season.
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· Qualified Personal Residence Trusts
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A qualified personal residence
trust (QPRT) is an effective way to remove a residence's value from one's
estate at a greatly reduced gift tax cost. Here is how it works: During
your lifetime, you transfer your residence to an irrevocable trust and
continue to reside in the home rent-free for a fixed number of years
("fixed term"), as specified in the trust agreement. This fixed
term should be a number of years that you are expected to live. During
this term, you will continue to pay mortgage expenses, real estate taxes,
insurance, etc. and receive income tax deductions for mortgage interest
and real estate taxes paid. When the fixed term ends, the residence is
distributed to your children or remains in further trust for them.
Even after the fixed term ends,
you can continue to use the residence if: (1) the home is retained in
trust for your spouse's lifetime instead of being immediately
distributed, thereby assuring that the home is available to you, or (2)
you enter into a lease with your children which will allow you to live
there for as long as you wish. If you do so, however, you must pay fair
market value rent to your children after the fixed term ends in order to
keep the residence from being subject to estate tax at your death.
Although your transfer of the
residence to the trust is a taxable gift, you are allowed to subtract,
from the fair market value of the residence, the value of your right to
live rent-free in the residence for the fixed term. Thus, the amount of
the gift will usually be substantially less than the fair market value of
the residence. If the amount of your gift is less than your available
exclusion from the gift tax ($1 million, reduced by amounts allowed for
gifts in previous years), no gift tax will result from this transfer.
If you survive the fixed term of
the trust, the value of the residence will be excluded from your estate
for estate tax purposes. Even if you don't survive the fixed term, the
estate tax consequences will be no worse than they would have been if you
hadn't created the trust in the first place.
The QPRT can be a powerful tax
strategy for you or your clients and should be considered as part of an
overall estate tax plan.
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· Tax Aspects of Caring for an Elderly Relative
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With care for the elderly being
such a important topic, there are many tax
aspects that should be considered. They can be easily overlooked as one
becomes so emotionally and financially involved in such a situation.
Dependency Exemption. You may be able to claim the cared-for
individual as your dependent, thus qualifying for an exemption. To
qualify, (a) you must provide more than 50% of the individual's support costs,
(b) he/she must either live with you or be related, (c) he must not have
gross income in excess of the exemption amount ($3,200 in 2005), (d) the
cared-for person must not be filing a joint return for that tax year, (e)
he/she must be a US citizen or a resident of the US, Canada, or Mexico.
If the support test above can only be met by a group (e.g. several
children), a "multiple support" form can be filed to grant one
of the group members the exemption.
Medical Expenses. If the individual qualifies as your
dependent, you can include any medical expenses you incur on their behalf
together with your own such expenses when determining your medical
deduction. If he/she doesn't qualify as your dependent due to the failure
to meet either the gross income test or the joint return test ((c) or (d)
above), you can still include these medical costs with your own. The
costs of qualified long-term services required by a chronically ill
individual and eligible long- term care insurance premiums (subject to an
annual cap) are included in the definition of deductible medical
expenses.
Filing Status. If you aren't married, you may qualify
for "head of household" status by virtue of the individual you
are caring for. If: (a) that person lives in your household, (b) you
cover more than half the household costs, (c) he/she qualifies as your
dependent, and (d) he/she is a relative, you can claim head of household
filing status. If the person is your parent, he/she need not live with
you, as long as you provide more than half of his household costs and
qualifies as your dependent.
Dependent Care Credit. If the cared-for individual qualifies
as your dependent, lives with you, and physically or mentally cannot take
care of himself, you may qualify for the dependent care credit for costs
incurred for his care that has enabled you and your spouse to work.
Caring for an elderly relative is
becoming such a pervasive issue for so many of us and involves an array
of financial and emotional issues. These tax matters should also be considered
when dealing with such an important matter.
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· January Tax Deadlines
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NYS LLC/LLP. Don't forget that the return
(IT-204-LL) and fee required for NYS LLC/LLP's is due 30 days after the
entity's year-end--January 30, 2005 for calendar year entities.
This is the second year that this January 30th filing deadline has been
in effect.
Individual Estimated Taxes--4th
Quarter 2004. These estimated
tax payments are due January 18th this year due to Martin Luther King's
Birthday.
Employment Tax Returns. Employment tax reports, including
W-2's, 940's and 941's are due by January 31st, including those due for
household employees, as noted in our Featured Article.
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