Tax Savings For Having Domestic Workers
A household employer is someone who hires people to perform duties around the home, such as nannies, gardeners, maids, private nurses, cooks, etc.
They are considered employees or domestic workers when this is their main profession and you control their hours, services, supplies, etc.
These domestic workers differ from independent contractors, such as construction workers who offer their services to the general public, set their own hours, and supply their own tools. Therefore, the tax requirements are different.
However, there are ways to save on your taxes if you hire domestic workers. Consider the following information if you are a household employer.
Dependent Care Flexible Spending Account
A Dependent Care Account is offered by some parent’s employers as part of a flexible benefits plan. It is a pre-tax expense account that parents can use to pay for child care and dependent care costs. These costs must be required for the parent to work.
You must meet the same criteria as mentioned above for the Child and Dependent Care Tax Credit to qualify for this type of account.
When you open an account, you will specify how much money to deduct from your payroll. Per year, a single family may only contribute $5,000.
However, some families earning over $85,000 may be able to make adjustments at the end of the year. Any money you contribute to this account is non-taxable.
If your employer offers this option, it can save you more money on your taxes than the Child and Dependent Care Tax Credit.
Child and Dependent Care Tax Credit
The alternative to the Dependent Care Flexible Spending Account is the Child and Dependent Care Tax Credit. If you hire a nanny and report and pay taxes on their wages, you may qualify for this tax credit.
This credit allows you to apply up to $3,000 (or $6,000 if you have two or more kids) of qualifying expenses toward a tax credit. The credit you’ll receive is dependent on your income, and according to the IRS, “the credit is worth between 20 and 35% of your allowable expenses.”
To qualify for this credit, you must meet the following criteria:
- Your nanny must be employed to care for a qualifying individual, which includes a disabled dependent, disabled spouse, or dependent child under the age of 13.
- You and your spouse (if married) must have earned an income during the tax year.
- The nanny’s care must be required so that you can work.
Talk to a tax professional to see if you qualify for this credit.
Do you have two or more dependents?
Because the Internal Revenue Code allows families with two or more dependents to itemize up to $6000 of qualified dependent care expenses, a family with a Dependent Care Flexible Spending Account that itemizes $5000 of qualified expenses may still claim up to $1000 in excess qualified expenses for the Child and Dependent Care tax credit. In no case may more than $6000 of qualified expenses be used in any combination with these two tax savings vehicles.
Health Care Deductions
One of the most hidden tax deductions that many people forget about is deductions for health care expenses. While this doesn’t apply to domestic workers specifically, it does apply to you if you hire a private in-home nurse. In this case, you may qualify for deductions in health care expenses.
According to the IRS, you can deduct health care costs if they account for more than 10% of your income—or 7.5% if you or your spouse were born before January 2, 1951. They also say:
“You can include in medical expenses wages and other amounts you pay for nursing services. The services need not be performed by a nurse as long as the services are of a kind generally performed by a nurse. This includes services connected with caring for the patient’s condition, such as giving medication or changing dressings, as well as bathing and grooming the patient. These services can be provided in your home or another care facility.”
Costs you can count toward this include “social security tax, FUTA, Medicare tax, and state employment taxes you pay for an attendant who provides medical care.”
Domestic Workers’ Bill of Rights
If your nurse provides other services outside of healthcare, such as cleaning, you will have to divide the time spent on medical care and other tasks to determine how much you’re truly spending on healthcare.
For example, you might pay your nurse $500 per week to provide in-home care. He or she may spend 90% of their time tending to you or your dependents, such as giving baths, administering medicine, etc., but spend 10% of her time washing dishes, doing laundry, and tidying up.
In that case, you will have to subtract 10% from the total amount you pay in wages. Therefore, you’re paying $50 per week to clean and $450 for health-related tasks. You can only claim the $450 per week.
Taxes as a Household Employer
Determining how much to pay in taxes and what credits and deductions you qualify for can be tricky for anyone, but it gets more complicated when you’re a household employer.
If you’re ever unsure of how to classify your domestic workers or don’t know what tax credits you qualify for, be sure to talk to a professional.
Contributed By: Kathleen Co-founded HomeWork Solutions in 1993 to provide payroll and tax services to families employing household workers. Kathleen has extensive experience preparing ‘nanny tax’ payroll taxes.
She is the author of numerous articles on this topic and has been featured in the Wall Street Journal, Kiplinger’s Personal Finance, and the Congressional Quarterly. She also consulted with Senate staffers in the drafting of the 1994 Nanny Tax Law.
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