CPAs can offer valuable compliance guidance.
The nanny tax problems that derailed several early Clinton administration nominees brought to national attention the tax issues involved when hiring household help. Some assume such problems are confined to wealthy taxpayers who can afford to hire live-in help, and others think the 1994 legislation passed in response to the Clinton nominees' troubles eliminated the problem. In fact, taxpayers who regularly hire baby-sitters or people to mow lawns may find they have federal or state obligations.
This article focuses on some of the issues that must be faced when CPAs' clients hire domestic help--Social Security, unemployment tax and withholding requirements--and examines some typical state law obligations. It also discusses recent changes in federal employment tax law, which shifted many reporting requirements from forms 942 and 940 to the taxpayer's own form 1040--typically prepared by CPAs, who may now be involved with clients who previously completed their own employment tax forms or relied on payroll services. (See exhibit t, page 47, for a listing of the titles and purpose of IRS forms, publications and notices.
IS THE CLIENT AN EMPLOYER?.
The first question for CPAs to consider is whether an employer-employee relationship exists. Taxpayers who hire independent contractors are not obligated to withhold or pay taxes. In contrast, taxpayers who are considered employers may have to pay Social Security taxes or make unemployment tax contributions based on the amount of compensation paid.
Various tests differentiate between employees and independent contractors. Generally, the focus is on the degree of control the hiring party can exercise over the performance of the services. Other factors include the nature of the services provided, the level of skill needed, the manner of compensation, the length of the employment relationship, the ownership of the equipment or facilities used to perform the services and the right to terminate the relationship.
A client who has the right to dictate how work is performed in addition to what work is done will be treated by the IRS as an employer and subject to employment tax obligations. In other words, someone who hires independent contractors has the right only to control the result of the work, but someone with employees also can control the manner of performance, whether or not that authority is exercised.
WHEN CLIENTS HIRE EMPLOYEES
When hiring a household employee, a client should be advised to verify the person can legally work in the United States. Form [-9, Employment Eligibility Verification, is available from the Immigration and Naturalization Service (INS) for this purpose. It requires an employer to review specified documentation--such as a birth certificate, driver's license or passport--to confirm employment eligibility. An employer keeps the I-9; it is not filed with the INS. An I-9 is not required for domestic work performed in a private home on a sporadic or intermittent basis. For example, a client who hires someone for one day to help wash the windows does not have to complete an I-9.
An employer also should keep a record of an employee's name and Social Security number exactly as they appear on the Social Security card. An employee without a Social Security number should apply for one even if no Social Security taxes will be owed based on the amount of wages paid.
Employers also must have employer identification numbers (EINs). Many mistakenly believe the nine-digit EIN is the same as a Social Security number; CPAs should cover this point carefully with clients. An EIN is issued by the Internal Revenue Service using form SS-4.
SOCIAL SECURITY AND MEDICARE OBLIGATIONS
For 1996, the taxable wage base for Social Security--the amount subject to old age, survivors, disability and hospital insurance (OASDI) taxes under the Federal Insurance Contributions Act--is $62,700. …