Expert Insights: Kathy Webb on How the Fiscal Cliff Effects Household Employers and Employees

by Michelle LaRowe
Editor in Chief

With the Fiscal Cliff negotiations taking center in news broadcasts and papers, everyone is well aware that the country was in some type of fiscal crisis. But with news coverage in the topic so wide, it can be hard to narrow in on how the resolutions practically affect household employers and employees.

Recently I connected with Kathy Webb of Homework Solutions, a nanny industry leader on household pay and tax matters to figure out how the recent negotiations truly impact those in our industry. Here’s what she had to share.

eNannySource: There has been a lot of talk about taxes and paychecks recently. What do household employers need to know?

Kathy: The Fiscal Cliff negotiations were certainly in the headlines! The most important take away for household employers is that the two year “Payroll Tax Holiday” was allowed to expire. What this means is that Social Security payroll withholding will go up by 2% over 2012, and every employee’s net paycheck will be smaller. There are some changes coming to Federal Income Tax withholding formulas, however, these will not significantly impact household employees.

The HomeWork Solutions’ Nanny Payroll Tax Calculator is up to date with published tax changes, most importantly the Social Security tax change. Employers should certainly recalculate before issuing any 2013 payrolls. Employers who fail to collect via deductions the correct tax amounts will still need to remit the additional tax to the IRS.

eNannySource: How about at the state level? Are there any particular changes at this level?

Kathy: Ten states and several large cities including San Francisco increased the minimum wage effective January 1, 2013. HomeWork Solutions’ website maintains a list of the minimum wage that applies to household workers. Washington State has the highest state minimum wage at $9.19 per hour, and the City of San Francisco the highest minimum wage nationwide at $10.55. Also, every year state unemployment tax rates are adjusted.

New York State employers are legally obligated to provide their employees their annual Pay Rate Notice between January 1 and February 1, 2013.

eNannySource: What other 2013 changes should a Household Employer be aware of?

Kathy: Many household employers reimburse the business use of their nanny’s personal vehicle at the IRS mileage reimbursement rate. This rate increased a penny to $56.5 cents per mile for 2013. Employers and nannies alike should remember that they have the obligation to maintain appropriate documentation of the details of the reimbursed business expense.

eNannySouce: Wrapping up 2012, what particular activities are needed to close out last year’s payroll obligations?

Kathy: January is a busy month for payroll tax reporting. What is top of mind for many nannies is that they are due to receive their Form W-2 no later than January 31, 2013 for 2012 wages. Employers, in addition to the W-2 forms, are also busy with 4th quarter reporting and end of year reconciliations.

It is very important to remember that nannies and almost all household workers are employees of the family – NOT independent contractors. Nationally, prosecution of employers for willfully issuing a Form 1099 to an employee is an enforcement priority. The US Department of Labor, the IRS and many states now formally share information between the agencies to facilitate the identification of offenders and the enforcement of payroll tax and labor laws.

eNannySource: 2012 Household Employment Taxes are reported to the IRS with the family’s income tax return. Are there any changes in this process?

Kathy: The Form 1040 Schedule H process has been largely unchanged over the last decade. The one item that catches employers by surprise, however, is when their Federal Unemployment Tax (FUTA) jumps unexpectedly. The bleak employment picture over the last 5 years has severely strained state unemployment funds, and the majority of states have had to take loans from the Federal government to meet benefit payment obligations. Currently 18 states are in arrears in their loan repayment and as a result the employers in these states face significant increases in their FUTA tax rate – a so-called “credit reduction.”

Most important for household employers is that families in these states who are household employers were ineligible for e-filing of their personal tax returns for 2011 and indications are this will continue for 2012 returns, as IRS computer systems are unable to accept the “credit reduction” worksheet.

HomeWork Solutions’ FAQ Common Questions: End of Year “Nanny Tax” Filings goes into considerable detail regarding these end of year activities. HomeWork Solutions’ representatives are also available for free telephone consultations weekdays at 800.626.4829, and welcome your calls.