Pay attention to the "nanny tax"

Do you remember the nanny tax scandals?  In recent years, several high-profile political figures had their appointments derailed because it turned out they hadn't paid their nanny taxes.  You may not lose out on high political office, but you could be liable for interest and penalties if you overlook this tax.

What is the nanny tax?  It's simply employment taxes on the wages you pay to certain domestic workers, such as baby sitters or housekeepers.  If you paid a domestic worker more than $1,300 in 2002, you may be required to report and pay social security, and Medicare taxes on their wages.  (The threshold increases to $1,400 for 2003.)  You could owe federal unemployment tax if you paid all your employees more than $1,000 in any calendar quarter.

To whom does the tax apply?  It doesn't matter what type of work is performed (gardening, baby sitting, nursing, or general household chores).  What does matter is whether your worker is considered to be your employee or an independent contractor.  Independent contractors are typically self-employed and, therefore, exempt from the nanny tax.  Some employees are exempt.  For example, you generally don't have to pay nanny taxes on wages paid to your spouse, your child under age 20, or any employee under age 17.  But there are exceptions, so you should check the rules carefully.

Avoid penalties and interest.  If you fail to pay the tax, you could be liable for interest and penalties on the tax owed, and possibly even a penalty for underpaying estimated taxes.  You might also have obligations to pay state employment taxes.