NEW YORK (MainStreet) — Lindsey Bellue has employed her current nanny for four months and in the past shared a nanny to help care for her 20-month-old daughter. “I'm a real estate sales assistant for a developer,” said Bellue, who lives in Austin. “It's a huge help to know that my daughter is well taken care of during the day and that her caretaker is just a phone call or text away.”
But at this juncture in the tax season, Bellue needs to be careful that she is not claiming the money she pays her daughter's caretaker as a deduction. Of course, there are plenty of changes in the tax code that allow for other strategic write-offs.
"Even if you operate your own business, you should not be claiming a business deduction for amounts you pay to a nanny or other household employee, because the cost of a household employee is a personal expenditure that is not deductible," said Ben Sullivan, certified financial planner with Palisades Hudson Financial Group in Scarsdale, New York. "You should maintain a separate payroll using a separate employer identification number (EIN) to pay the household employees' wages."
Wages for child care workers vary with employers as do benefits like health care depending on the licensing, certification and education of the nanny, but according to the International Nanny Association the most common salary is $600 a week. Household employees are non-exempt workers whose pay is tied to an hourly rate, which is impacted by minimum wage. At this time, 21 states and 8 cities have already raised or are reportedly planning to raise their minimum wage in 2015.
“Since nannies fall under a very niche industry, many tax, payroll and labor laws are not written with their specific job in mind,” said Tom Breedlove, household tax expert with Care.com. “However, over the past few years, legislative forces like the Domestic Worker Bill of Rights have pushed the industry out of the shadows to the point where laws are being tweaked or created to account for them and other household employees.”
There are several changes to so-called nanny taxes this year. For example, mileage reimbursement has increased from 56 cents to 57.5 cents per mile. “The mileage reimbursement increase is significant because the employers’ costs and nanny's take-home pay will rise,” Sullivan said. “This rule change is also a reminder that household employers need to comply with highly technical employment laws and tax rules.”
But not every state requires household employers to reimburse their help for mileage. “Nannies who are not reimbursed for their mileage can claim an employee business expense deduction for the mileage they drive,” Sullivan told MainStreet.
Another tax code shift is that the average family can save $200 in taxes if they pay their nanny’s phone bill. “An employer can pay for their nanny’s cell phone service and treat it as non-taxable, which means neither the family nor the caregiver have to pay any taxes on that portion of her compensation,” Breedlove told MainStreet.
That’s because the IRS ruled that the duties of a caregiver may require a cell phone in the event of a medical emergency.
"Nannies can benefit from this rule, since they aren't required to report income as a result of their employer-provided cell phone," Sullivan said.
Finally, for the first time, employees who purchase health insurance policies through the health care exchange will be eligible to apply for a federal subsidy.
“Generally speaking, you can qualify for a subsidy if your income is less than 400% of the federal poverty level and you have documented wages,” said Breedlove. “But nannies need to be paid on the books, or they won’t qualify for lower health insurance premiums.” The federal health insurance subsidy is tied to several different factors, including income, residency and number of children that need health insurance coverage.
“More and more families are complying with the law, which allows nannies to qualify for the same benefits and protections enjoyed by the rest of the workforce,” Breedlove said.
—Written for MainStreet by Juliette Fairley