Tuesday

(Another) Nanny Tax Problem...

Received Tuesday, February 19, 2008-Perspective & Opinion

I have a huge tax problem. I am working for a very decent family and I have a very good job. Our work relationship, however pleasant is strictly professional. I make mention of this so you can understand why I bring my question to an anonymous forum and not straight to my employers.

I have been with them 19 months as of now. I accepted the position after being flown out to the LA area from Princeton, NJ where I had been working as a nanny. After a brief negotiation of duties and salary, we settled that I would make X amount of money and they would claim me on their taxes, paying the taxes required of me. So that what I took home every week was my net and not my gross, I was assured by both parents that they would pay my taxes for me when I figured them at the end of the year. This way, they paid the exact tax bill, no more-no less. Last year, it worked out fine. I figured my taxes, provided them a copy of my return and I was issues a personal check in the exact amount by the father. I deposited that money in my checking account and wrote the IRS a check and sent in my tax return. No problem.

This year had proceeded just the same. Last week, I went home to New Jersey and was present while IRS agent was completing his audit of my mother. I was present as her witness/support. Again, I don't want to reveal too much. The auditor was very nice and helpful and was working towards wrapping things up with my mother, feeling everything was satisfied and in order. I have to make it clear the auditor was very personable and asked about children and our jobs and also spoke of his own children. He was talking about his nanny and how he has had the same nanny for so many years. I am only mentioning this all, so you can see the train of thought on how this went. I boasted of my great employers and how I was paid on the books and they took care of all the taxes. The auditor told me that I couldn't do that. He said in no uncertain terms, that check that was written out to me last year and this year {only last week} is taxable in and of itself and I should be the wiser to claim it correctly.

To make this long story short, since I opened my mouth, do I have to eat this cost myself? Or could they have been handling my tax situation differently by grossing up the net as withholding and reporting it like that? Do I mention this to my employer or not? I have not spoke further about it to anyone as I am tempted to just ignore the whole conversation. The auditor did not say he was going to report me or come after me, but now I feel I am losing sleep over this. Should I be? I mailed my tax return in for 2007 on Thursday of last week.

14 comments:

Anonymous said...

I really would not worry about it at all. And I actually think the IRS guy is wrong. My husband works for a major banking firm and gets reimbursed for expenses all the time and it isn't considered part of his income. If he spends $500 on a plane ticket on his credit card, his company gives him a check for $500 as reimbursement and it isn't considered part of his 'salary' and he doesn't pay taxes on it. Your agreement with your employer was that employer would pay your taxes and that is what they are doing. If this still bothers you, next year, have your employer pay your taxes by writing a check directly to the IRS on your behalf (just include your ss# on it) or have them reimburse you in cash. But I wouldn't lose sleep over this.

Anonymous said...

I agree completely with the first poster. I don't think this is anything to worry about. The money they gave you was NOT additional income, it was reimbursement for an expense. I've paid my taxes this way in the past and never had a problem.

mom said...

Couple of things.
First, an expense is something different. When you are reimbursed for an expense you have had in the course of business it is not income, because you have already spent the same amount of money, so it is a wash. If you were not reimbursed by your employer, that money could be counted as a deduction as a business expense.

When we moved for my husband's job, the company paid all of our moving expenses and also reimbursed the difference between the value of our house and what we had originally paid for it, as well as all improvemnets we put into it after the fact. (We had bought a house when prices were high and it had lost value, which we were unwilling to sacrifice by selling at that moment...so they paid the difference in order to entice him to move.) We were surprised to have the total, over $100,000, tacked onto our "income" at the end of the year. But we were able to deduct all of the moving expenses from our taxes, since they were now "unreimbursed" income. But we had to pay on the house reimbursement.

OP, the amount you would owe on the check your employers gave you to cover your taxes (yes, sorry, it is income)would likely be very, very small...since you have had taxes taken out all year long. Your tax bracket is likely low, and you would only have to pay on the one check. Since you are losing sleep (which says to me that you are probably an incredibly honest person who may have a hard time living with doing the "wrong thing", no matter how small...and good for you for that) I would just go ahead and pay it and put it behind you. The comfort that being honest and knowing you did the right thing (not to mention the peace in knowing the IRS will never have issue with you) is probably worth the few bucks it will cost.

You might consider not mentioning the whole thing to your employers. It might cause them to think it's "not worth it" to pay your final tax bill. You are still coming out way ahead in the end by having them make the initial payment.

Anonymous said...

True-total reimbursement for an expense-no worries. And, why in the world would anyone chit chat with an IRS agent about their income and money? it's the IRS for crying out loud! Keep your business to yourself!

Anonymous said...

This is not reimbursement for an expense. It is additional income. For example, if you made $30,000 and your total taxes were $5,000 for that income level, than your true income is $35,000. If the employers had been withholding taxes, then the gross income would have been $35,000 and you would be taxes on that amount. If you ever get caught, your employers will be in trouble as well, so you might want to bring it up just to cover everyone's backsides.

erics mom said...

I agree with 10:02

Why in the world would you open your big mouth?

gigi said...

i think the nanny feels dumb enough about that part!

Anonymous said...

The IRS agency was 100% right. The tax checks from the employer are additional income to the nanny.

Why don't you fix it for 2008 and going forward? Figure out what your gross has to be to clear what you expect, and have your employer report and issue your W2 accordingly? There are free nanny tax calculators online to help you figure this out.

I agree, don't volunteer info to the IRS auditor. I honestly think the nanny didn't know this was wrong though, so enough said.

Anonymous said...

Here's a good net to gross tax calculator:

https://secure.gtmassociates.com/calculator.asp
You can even get paystubs printed out at
http://www.4nannytaxes.com/calculator/index.cfm

You should talk to your employer about this. Obviously, they think they are doing the right thing too (or why would they pay your taxes in the first place) and they don't want to get stuck with fines if they also are making a mistake.

melamonk said...

To the anonymous poster who posted the IRS links. You are so helpful. I wish I knew who you were. I appreciate when people go out of their way to look up information for others. It's a glimpse into your character.

Anonymous said...

Something no one has pointed out is that an individual can give someone up to $13,000 per year as a gift tax free. Your employer and his wife can each give you that amount tax free, so a total of $26,000. The amount they gave you to cover your taxes was (I assume) way under that amount. You have nothing to worry about. That money does not have to be considered income.

mom said...

Hmmmm...I don't know 2:37. That sounds just a bit questionable to me, although I do not claim to know for sure.
It seems to me that if it were that simple it would be standard practice for all employers to give the first $26,000 of each employee's salary as a "gift" and save on all of the taxes that they also have to pay on that money when it is given as a salary.

It may be that there is a specific, and additional, "gift tax" that kicks in after that amount is met? I seem to recall having to stay under a certain amount when putting money into our kid's college funds each year...and I think it had something to do with that.

Anonymous said...

To 2:37, I think that applies to relatives. Elderly folks can gift their children and grandchildren up to a certain amount, and I actually thought it was $12k, not $13k. Years ago, I remember it was $10k. Anyway they can gift this amount without having to incur taxes or penalties. I don't think you can just go around gifting $12k or $13k to anyone anytime. I think it has to be relatives.

Anonymous said...

I'm 2:37 it's anyone--doesn't have to be relative. You don't have to be elderly to do it. In 2007 it was $12,000 I thought for 2008 it was $13k but I'm too busy to look it up because my nanny is at a grad school interview today and I have two kids under 2. Look it up people.