Author: Leon Clinton

The tax law can jump up and bite you in unexpected places. One example of that is the nanny tax. 

Do you have a household employee such as a nanny, a caregiver for an elderly relative who moved in with you during the pandemic, or a live-in housekeeper? 

You may have hired somebody to help out during difficult circumstances caused by the COVID-19 mess. 

Maybe that was a temporary arrangement, or maybe it has turned into a permanent one. In either case, the dreaded nanny tax issue may be in play.

The nanny tax refers to your duty to withhold and deposit a household employee’s share of Social Security and Medicare taxes on wages paid to the employee and also to deposit the employer’s share of those taxes.

First, let’s clarify who can potentially count as a household employee. According to IRS Publication 926, Household Employer’s Tax Guide, household employees are individuals who do household work—such as performing as a nanny, caretaker, private nurse, babysitter, housekeeper, maid, driver, or butler. Household work includes only performing services in or around your private home. 

According to IRS Publication 926, a person who does household work is your employee if you control not only what work is done but also how the work is done. So, if a worker regularly comes to your home on a schedule dictated by you and is supervised by you, the worker is probably an employee. 

It doesn’t matter whether the work is full time or part time, or whether you hired the worker through an agency. But if an agency supplies the worker and controls what work is done and how it’s done, the worker is not your employee. 

Yard care workers, pool service guys, maids, and the like who provide services to the general public and just show up at your place periodically to go about their business are not your employees. 

For 2021, the FICA tax issue arises only if you pay a household employee $2,300 or more during the year.

The nanny tax rules are complicated, and complying with them can be a time-consuming nuisance.

If you would like to discuss the nanny tax, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• July 8, 2021

The Work Opportunity Tax Credit rewards your good deeds. 

And now, because of new legislation, the rules are in place for longer than usual. 

If you need to hire workers in your business, this dollar-for-dollar reducer of your taxes is one to know about.

Suppose your business hires a member of a targeted group. In that case, you can claim the potentially lucrative federal Work Opportunity Tax Credit (WOTC) for some of the wages paid to the individual.

Overview of the Credit

The credit generally equals 40 percent of qualified first-year wages paid to an eligible employee, up to a maximum wage amount of $6,000. That translates into a maximum credit of $2,400 (40 percent x $6,000).

Of course, some employees don’t work out. The tax code recognizes that and reduces the credit rate to 25 percent of qualified first-year wages for an employee who completes at least 120 but fewer than 400 hours of service. That translates into a maximum credit of $1,500 (25 percent x $6,000).

Eligible Employees

To be an eligible employee, your new hire must be certified as a member of a targeted group by the applicable State Workforce Agency (SWA). You, as the employer, can either 

• obtain the certification by the day the employee begins work, or
• complete a pre-screening notice, using IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit), by the day you offer a job to a prospective employee. Then submit Form 8850 to the SWA (not to the IRS) within 28 days after the employee begins work.

Click here for links to the names, addresses, phone and fax numbers, and email addresses of the WOTC coordinators for each of the SWAs.

A simplified certification process is available for qualified unemployed veterans.

You can claim the WOTC only if you hire a member of a targeted group. Targeted groups include the following:

• Qualified IV-A recipients
• Qualified veterans
• Qualified ex-felons
• Designated community residents
• Vocational rehabilitation referrals
• Qualified summer youth employees
• Qualified supplemental nutrition assistance benefits recipients
• Qualified SSI recipients (anyone who is certified by the designated local agency as receiving Supplemental Security Income benefits under Title XVI of the Social Security Act for any month ending within the 60-day period ending on the hiring date)
• Long-term family assistance recipients
• Qualified long-term unemployment recipients

Exceptions to the General Rule on Credits

There’s a higher limit of $12,000 for first-year wages paid to a qualified veteran who is entitled to compensation for a service-connected disability and was discharged or released from the military within the past year. That translates into a maximum credit of $4,800 (40 percent x $12,000).

There’s an even higher limit of $14,000 for first-year wages paid to a qualified veteran who was unemployed for at least six months in the prior year. That translates into a maximum credit of $5,600 (40 percent x $14,000).

If a qualified veteran both has a service-connected disability and was unemployed for at least six months in the prior year, the limit for first-year wages is $24,000. That translates into a maximum credit of $9,600 (40 percent x $24,000). Wow!

The WOTC for a long-term family assistance recipient equals 40 percent of qualified first-year wages, up to a maximum wage amount of $10,000. That translates into a maximum credit of $4,000 (40 percent x $10,000). 

In addition, for long-term family assistance recipients, the WOTC can be claimed for 50 percent of qualified second-year wages, up to a maximum wage amount of $10,000. That translates into a maximum second-year credit of $5,000 (50 percent x $10,000) and a maximum combined credit for the two years of $9,000 ($4,000 + $5,000). Another wow!

The WOTC for a qualified summer youth employee (a 16-year-old or 17-year-old who lives in an empowerment zone) equals 40 percent of first-year wages paid during any 90-day period between May 1 and September 15, up to a maximum wage amount of $3,000. That translates into a maximum credit of $1,200 (40 percent x $3,000).

If you would like my help with the WOTC, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• July 2, 2021

The PayPal loophole is going away in a little over six months from now.

You may remember the strategy where you can avoid giving 1099s to contractors and vendors when you use PayPal or a similar service as your payment platform.

With this strategy, you push the reporting requirements to PayPal. Current federal law requires that PayPal file Form 1099-K with the IRS and send it to you when

• your gross earnings are more than $20,000, and 
• you have more than 200 transactions.

Example. You work as a consultant. Your clients pay you $30,000 via PayPal. PayPal does not give you a 1099-K because this fails the more than 200 transactions in a calendar year test.

According to lawmakers, this created a situation where those people who use PayPal have an easy ability to cheat (i.e., not report the income on their tax returns).

Starting January 1, 2022, the American Rescue Plan Act kills the two-step “more than $20,000 and more than 200 transactions” threshold for third-party settlement organization (TPSO) filing of 1099-K and replaces it with the single “$600 or more” reporting threshold.

The Joint Committee on Taxation estimates that this change in the 1099 rules will gain more than $8 billion in new taxes over the next 10 years with this change.

Several states have already closed this reporting loophole on the state level: 

• Maryland, Massachusetts, Mississippi, Vermont, and Virginia require a 1099-K to be filed with the state tax agency if a TPSO pays a state resident $600 or more during the year. 
• Illinois and New Jersey have a $1,000 1099-K threshold (plus, for Illinois, a requirement of at least four transactions). 
• Arkansas has a $2,500 threshold. 
• Missouri has a $1,200 threshold.

If you would like to discuss the new rules, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 30, 2021