Household Employer Tax Break Options

Household employers are entitled to tax breaks if they pay their employee payroll taxes (also known as "nanny taxes") legally. There are two tax breaks available to household employers with dependent care expenses:

• Dependent Care Account (also commonly called a Flexible Spending Account). Most businesses allow their employees to contribute up to $5,000 of their pre-tax earnings to a Dependent Care Account to cover childcare expenses. This means there is no federal income tax, state income tax or FICA tax on that $5,000 of income. Depending on your tax bracket, this deduction will save you about $2,300 per year which will offset – sometimes exceed – your employer tax liability. In order to qualify for this account, both spouses must work. Companies have considerable leeway in how these accounts are administered and requirements of qualification; check with your company’s HR department or Accounting department to better understand your options. Once set up, we can provide you with the paperwork you'll need to take advantage of this tax break.

• Child Care Tax Credit. If you don’t have access to a Dependent Care Account, you can claim the Tax Credit for Child or Dependent Care (IRS Form 2441) on your personal income tax return at year end. This tax credit saves $600 for families with one dependent or $1,200 for families with two or more dependents.

IF YOU HAVE 2 OR MORE DEPENDENTS: please note that the government allows families with 2 or more dependents to itemize up to $6,000 of dependent care expenses.  Therefore, if you use $5,000 for your Dependent Care Account, you may have an additional $1,000 in excess expenses that can be claimed on Form 2441, which would save you an additional $200 per year off your tax bill.

Other Benefits of Compliance

In addition to tax breaks, there are other advantages to paying legally, specifically:

• Job History. Your employee will be establishing an employment history, which is necessary to qualify for a car loan, home loan, student loan, credit cards and many other everyday transactions.
• Social Security & Medicare. Your employee will receive retirement benefits and basic medical coverage through Social Security and Medicare contributions. Research shows the average household employee paying employee payroll taxes will receive $5 for every $1 they contribute.
• Disability. Your employee will receive financial assistance for any disabling injury or illness that does not result from the workplace (including maternity leave).
• Workers’ Compensation. Your employee will receive financial assistance with lost wages and medical expenses due to injury or illness in the workplace.
• Unemployment Benefits. Employees are generally entitled to receive up to six months of unemployment benefits at up to 50% of their salary if they lose their job through no fault of their own.
• Earned Income Credit. Employees who are single parents may qualify for this federal tax break, reducing their tax bill by as much as $3,500 per year.
• Peace of Mind. The IRS is cracking down on household employers who pay “off the books” or misclassify their workers as independent contractors. The IRS considers it tax evasion and offenders are saddled with expensive back taxes, penalties and interest. In some cases, they’ve even been stripped of professional licenses. It’s simply not worth the risk.