Legal Review

The Legal Review

Bringing the Law to Life for the Household Employment Industry

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A Complimentary Resource from © 2010 Breedlove & Associates, LLC.
Breedlove & Associates
In an effort to help you strengthen your business practices and steer clear of legal trouble, The Legal Review will share findings from relevant legal cases. We've found that the easiest way to gain a practical understanding of complex tax and labor law is by reviewing real-life situations. These stories will illuminate potential legal landmines for your agency and/or your clients, and more importantly, show you how to avoid them.
Summer Nanny Slip-Up
As the school year begins to wind down, many families begin thinking about a summer nanny. Since these positions generally last for only a few months, some families choose to ignore their household employer payroll and tax obligations - out of a fear of costs or paperwork or both. This case illustrates that these fears are unfounded - especially for families with short-term or part-time nannies.

The Mistake

A family hired a part-time nanny to care for their children during the summer. They agreed to pay the nanny $15 per hour. By the end of the summer, it had amounted to 300 hours or $4,500. Due to the temporary nature of the position, the family decided it would be easier to "just pay the nanny in cash." A misperception about cost also played a role in the decision, as the husband had assumed "that the employer taxes would make the summer nanny prohibitively expensive."

The Law

Household employers who pay an employee more than $1,700 (2010) in a calendar year are required to withhold Social Security and Medicare taxes from the employee's wages. They also have an obligation to match the Social Security and Medicare withheld, and pay federal and state unemployment taxes. It is the employer's responsibility to see that all taxes are remitted to the appropriate tax agencies. These requirements must be met, even for short-term and part-time arrangements.
Families who pay legally have two tax break options available:
Dependent Care Account (also known as "Flexible Spending Account" or "FSA"): Many employers allow employees to set aside up to $5,000 of pre-tax earnings for childcare expenses. Enrolling for this benefit can save families up to $2,300, depending on their tax bracket.
Child or Dependent Care Tax Credit: Families can take advantage of a 20% credit on expenses of up to $3,000 for one dependent, or up to $6,000 for two or more dependents.
These tax breaks offset most of the tax cost for those hiring full-time nannies. For those hiring short-term or part-time nannies, the tax breaks usually outweigh the tax costs by a significant margin. Here's a look at the math for our summer nanny situation if they had paid correctly:

Employee's Gross Wages $4,500
Employer's Tax Obligation $506
Total Cost before Tax Breaks $5,006
Savings from FSA <$2,200>
Total Cost after Tax Breaks $2,806
As you can see, in this example, when the family pays in cash, their cost is $4,500. On the other hand, if the family pays legally and capitalizes on the childcare tax breaks, the cost drops down to $2,800 - a savings of $1,700! Plus, there's the added perks of 1) no legal risk, and 2) the nanny gets all the benefits and protections of professional pay (i.e. Social Security, Medicare, unemployment, disability, ability to obtain credit, etc.).


The Mess
At the end of the calendar year, the family requested reimbursement from their Dependent Care Account for the $4,500 in wages paid to their summer nanny. The HR department informed the family that FSA reimbursement required formal paperwork (i.e. paystubs) to demonstrate a qualified childcare expense.

Anxious to sort out their situation prior to the end of the tax year (FSAs have a "use-it-or-lose-it" stipulation), the family contacted Breedlove & Associates for help. We set them up, filed their overdue reports with the state, prepared all necessary year-end documents and then terminated their service with us (we don't require a long-term commitment so families can cost-effectively use our service for any length of time).

Since no taxes were withheld from the employee's wages, the family had to either cover her share of Social Security and Medicare taxes or go back and collect those taxes from their summer nanny. They opted to pay it themselves.

The Outcome
By playing catch up at the end of the year, the family was able to utilize their FSA allocation under the deadline and they were able to minimize their penalties and interest. However, they paid a price for their procrastination. Their actual budget ended up as follows:

Employee's Gross Wages $4,873 ($4,500 + Employee's Social Security and Medicare)
Employer's Tax Obligation $543
Penalties & Interest $260
Total Cost before Tax Breaks $5,676
Savings from FSA <$2,200>
Total Cost after Tax Breaks $3,476
Cost If Handled Correctly $2,806
Loss Due to Procrastination $670
As you can see, although the family still saved more than $1,000 by paying legally, they threw away another $670 in savings simply because they waited until the end of the year to fulfill their obligations.

How the Whole Thing Could Have Been Avoided

Had the family visited the Employer Budget Calculator on our website or called us, they would have immediately realized that their cost and complexity fears were based on misperceptions rather than reality. Tax breaks more than covered the employer tax costs - especially in a short-term employment situation like this. And a service like ours can handle all the paperwork for a small, tax-deductible fee and no long-term commitment.

If your families want more information about tax breaks for summer nannies, they can visit our website or call us for a complimentary, no-obligation, no-pressure consultation. In about 10 minutes, we can assess their individual situation, explain the law, guide them past all the labor law landmines, help them capitalize on their tax breaks and address any questions or concerns they may have. Whether they join our service or not, they'll be armed with all the budgetary and legal knowledge they need to make informed decisions.


If you have additional questions, please call 888-BREEDLOVE (273-3356)
or visit www.breedlove-online.com. We're here to help our agency partners
provide their candidates and clients with information, tools and resources
that improve the employment relationship, eliminate legal risk for all parties,
and increase the professionalism of the industry.