A: The short answer to your question is: Yes! Any time you pay someone for services, you create the potential need for filing either a W-2 or a Form 1099-MISC, depending on whether the person is considered an employee (W-2) or an independent contractor (1099-MISC). In your case, your helper is most likely an employee.
Generally, individuals employed around your house such as house cleaners, nannies, private nurses and even regularly employed yard workers are considered employees subject to “Nanny Tax” reporting. A freelance worker that you hire for an odd job now and then is normally an independent contractor, but those whom you engage on a regular basis and work under your direction are employees.
Most household employees are just paid a flat amount – for example, $100 for each day they work at your home. The employer can withhold taxes from the gross amount paid and just give the employee the net amount. Alternatively, the employer can cover all payroll taxes. In either case, the taxes are remitted to the IRS when you, the employer, file your individual income tax return by including Schedule H with your return.
If you paid your employee $1,800 or more in 2012 (or 2013), you will need to pay Social Security taxes of 10.4 percent (12.4 percent in 2013) on wages of up to $110,100 ($113,700 in 2013) and Medicare tax of 2.9 percent. If you elect to withhold taxes from your employee’s pay, the employee’s share of the Social Security tax is 4.2 percent (6.2 percent in 2013) and 1.45 percent of the Medicare tax.
If you pay the employee less than $1,800, you still should file the Form W-2, but these taxes will not apply. Further, if you paid any one employee $1,000 in any calendar quarter, you will also need to pay federal unemployment tax of 0.6 percent on the first $7,000 of earnings.
And don’t forget about Idaho! The same $1,000-per-quarter rule applies for our state. If you pay more than $1,000 in a calendar quarter, you will need to register with Idaho Commerce & Labor and pay the state unemployment insurance tax, too.
Back in 1993, President Bill Clinton nominated Zoë Baird to be U.S. attorney general, but she was forced to withdraw her name from consideration when it was discovered that she had not paid her Nanny Tax for her illegal immigrant chauffeur and nanny. The monetary fine she paid wasn’t large, but she did miss out on a nice job opportunity. So make sure you understand your requirements as an employer and avoid your own personal Nannygate.
Q: I made more money in 2012 than my husband. He finished school last year and started a new job while I was employed full time for the entire year. He paid tuition and other expenses that I know can be deducted, but I am afraid our combined income may be too high and cause some of those deductions to be lost. Can we file separate returns so we won’t run into the income limits?
A: In my 25+ years of preparing tax returns, I think I have only seen one or two situations where filing separate was a better tax answer. Most of the married filing separate tax returns I have prepared were in an effort to keep one spouse’s income separate from the other spouse in one of the nine community property states like Idaho.
The right and correct answer to your question is that you have to run your return both MFS and married filing joint to see which gives the best result. Normally the rate structure for MFS is so much worse than for MFJ that unless your separate income and deductions (and the moon and the stars) line up just right, the MFJ answer will be better.
More specifically to your situation, the tuition deduction begins to phase out for MFJ returns at adjusted gross income of $130,000 in 2012 and completely phases out at income of $160,000. But, if you file MFS, the tuition deduction is not allowed at all. So if the only reason you are considering filing separate is due to the tuition deduction, you certainly will be better off filing MFJ.
To ensure compliance imposed by IRS Circular 230, any U.S. federal tax advice contained in this article is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed by governmental tax authorities. The answers in this column are meant to offer general information. You should consult your tax adviser regarding the specifics of your situation.
Peter Robbins is a partner in the Boise office of CliftonLarsonAllen, LLP specializing in tax matters for small businesses, individuals, and trusts and estates.
Have a question for Robbins? Email your question to email@example.com. Enter “Talking Tax” in the subject line.