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If you ponied up for a nanny in 2018, you just might be eligible for a tax credit next year — as long as you aren't paying him or her under the table.
The Tax Cuts and Jobs Act overhauled tax planning for many filers, including families: The standard deduction went up to $12,000 for singles ($24,000 for married couples), personal and dependent exemptions disappeared and certain itemized deductions have been limited.
Working parents should know that the child and dependent care tax credit remains: This is a tax break you can grab if you paid for day care, summer camp or a sitter.
You may qualify for a credit of up to $1,050 for a child under age 13 ($2,100 for two or more kids).
The catch: If you're hoping to grab this break, you can't be paying your nanny off the books. You're supposed to pay your care provider legally and remit the appropriate employment taxes.
"In general, the nanny tax is paid as part of your tax return," said Tim Steffen, director of advanced planning at Robert W. Baird, a wealth management firm.
"The IRS may not know that you have a nanny at this point until you file your return in April," he said.
Here's how to clean up your act and get that credit.
Childcare expenses are approaching the cost of college tuition. For instance, it costs an average of $580 a week to hire a nanny to care for an infant child, according to Care.com.
If you paid your nanny — or any household employee — more than $2,100 in 2018, then it's on you to withhold Medicare and Social Security taxes, which add up to 15.3 percent of wages and are to be split between the worker and employer.
If you paid at least $1,500 in any quarter of 2018, then you're also on the hook for federal unemployment taxes and potentially state unemployment taxes. That adds up to 6 percent of wages.
"If you're paying someone to provide you with services, they have to report it as taxable income," said Steffen.
"If you don't pay Social Security and Medicare taxes for your employees, you're subject to penalties and fines," he said. "It can be considered a felony if you don't pay, and this can lead to prison time if it's egregious."
You may also face penalties for failing to send your nanny a Form W-2, stating his or her wages and taxes withheld. The last day to do so for the 2018 tax year will be Jan. 31.
Don't try to skirt the law by mischaracterizing your nanny as an independent contractor.
If you control the the work that is done and how it's done, then this person is your employee, according to the IRS.
Addressing back taxes, particularly if you've been paying your nanny under the table for years, is a messy affair.
When reporting to the IRS for past years, you would have to provide the gross wages for the employee's share of Social Security and Medicare, said S. Andrew Smith, principal at Baker Newman Noyes in Portland, Maine.
Your nanny would have to file an amended return for each of those years to reflect wages that were paid — and could be subject to interest and penalties.
You could be subject to interest and penalties, too.
"If the employer is amending a return to pick up the child and dependent care credit, that might generate a refund that could be larger than the payroll taxes," Smith said.
Here's what you need to make things official with your employee and the IRS:
Form W-4: A withholding allowance certificate that you'll need from your employee if you withhold federal income taxes.
Schedule H: You'll turn in this form with your 1040 when you file your taxes next spring. This will spell out how much you paid your employee and the applicable unemployment, Social Security and Medicare taxes paid.
It's also a good idea to have an employment contract with your employee so that you can address issues such as sick days and vacation time.
Be aware that you could be subject to additional state and local requirements in the form of minimum wages, mandatory paid sick leave and overtime pay.