· What taxes and/or deductibles would I be responsible for?
· What arrangements should I make to pay these taxes?
· What is the percentage of the individual taxes that I would have to pay?
A. I am making the following assumptions in providing my answer -
(1) You are age 18 or older, and
(2) You will be working in the home of your employer, and not providing child care services in your own home or some other location.
First and foremost, you are not be responsible for “all of your taxes and/or deductibles” out of your own pocket.
A nanny, or a housekeeper, baby sitter, health aide, private nurse, maid, caretaker, yard worker, or similar domestic worker, who is hired directly by a family to work in the family’s home, and the family controls what work is done and how it is done, is an employee of the family under common law. You are a “household employee” and fall under the “nanny tax” rules.
Under the “nanny tax” rules, a domestic employer who pays a household employee more than $1,500 in cash wages in the calendar year for 2007, or $1,600 for 2008, is required to pay “payroll taxes” on the wages paid to the employee. These payroll tax obligations include:
· FICA (Social Security & Medicare) Taxes (7.65% of Gross Wages),
· FUTA (Federal Unemployment) Tax (0.8% of gross Wages in most circumstances), and
· NJ State unemployment and disability insurance contributions
The FICA taxes are shared equally between employer and employee. Each contributes 7.65% of the gross wage. Generally the employer will withhold the employee’s share from the cash wages paid. In your case $49.73 should be withheld from your $650.00 weekly pay for FICA taxes. If the family fails to collect this tax from you (the employee) via payroll deductions, the family will be liable for both the employer and employee portions of the tax or 15.3% of gross wages.
The FUTA tax is paid 100% by the employer. There is no withholding for FUTA tax.
The family should also withhold a small amount, $6.01 per week until the less than $300.00 annual maximum is met, for NJ state unemployment and disability contributions.
Deducting federal and state income taxes is optional. If income taxes are not withheld from the cash wages by the employer then the employee is required to make periodic payments of any amounts due.
If your employer does not withhold federal or NJ state income taxes from your $650.00 weekly payment you should make quarterly federal and state estimated tax payments. If we assume you will be filing your tax returns as a single person with no dependents you should put aside $73.00 for federal and $11.00 for state income taxes (Single-1) or, more better, $83.00 for federal and $11.00 for state income taxes (Single-0), each week and send this money to “Sam” and “Jon” on April, June, September and January 15th.
Click here to download the 2007 federal estimated tax payment vouchers and instructions, and here for the 2007 NJ vouchers. Once you are “in the system” you will receive the vouchers and instructions from “Sam” and “Jon” automatically each year.
Your employer must provide you with a Form W-2 (and not a Form 1099-MISC) in January, just as any other employer must do for its employees.
I infer from the information provided in your question that your employer wants to treat you as an independent contractor and not an employee so they can avoid the required payroll taxes. However, as discussed above, under the law you are indeed an employee.
The IRS has reaffirmed the position that you are an employee and not an independent contractor in at least two private letter rulings (PLR 199923014 and 199923015). In these rulings the IRS disregarded a written contract's designation of a worker as a contractor, ruling that the substance of the relationship and not its label determines the worker's status.
If your employer family does not treat you as an employee and file a Schedule H with its annual Form 1040 (and the appropriate NJ state payroll tax returns) to report and pay the required payroll taxes they are committing tax fraud and are subject to substantial penalties. There is no statue of limitations on the failure to report and remit federal payroll taxes.
I am sure you have heard the stories of domestic employers whose political careers were cut short, or never begun, because they failed to pay payroll taxes on their household employees.
For more information on the nanny tax issue you can check out the FAQ Page of NannyTaxes.com (the site of an accounting firm that provides services to domestic employers), IRS articles on “Employment Taxes for Household Employees” and “Hiring Household Employees”, and IRS Pub 926 “Household Employer’s Tax Guide”.
I hope I have been of help. Let me know if you have any other questions on the subject, or need clarification of anything I have discussed above.