If you employed a nanny to help care for your children during the year, you must report the income paid to her on the appropriate Internal Revenue Service, or IRS, form. Before completing the form, you will need to determine whether your nanny was an employee or an independent contractor. Failure to properly classify your nanny as an employee can result in you owing employment taxes for your nanny.
W-2 or 1099-Misc.
When you pay someone for services or work she performs, you must provide a tax form at the end of the year indicating how much she was paid for the work or services. In general, there are two types of forms used to document how much was earned -- a W-2 or a 1099-Misc. A W-2 is used when the person was your employee during the year while a 1099-Misc.is used if she was an independent contractor. You must provide a W-2 to all employees, regardless of the amount you paid them. At time of publication, you provide a 1099-Misc. for all independent contractor's to whom you paid $600 or more during the year.
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Defiition of Employee
Common law rules essentially define someone as your employee if you have the right to control what they do on the job and how they do it. While it can be true that anyone paying for a service has some say in how the service is performed, the critical issue is whether you can control the details of the job. In the case of a nanny, you may wish to look at who determines the hours that will be worked, where the work is performed and what happens during the working hours.
Definition of Independent Contractor
An independent contractor is someone who offers her services to the general public but who retains a good deal of control over how the service is to be performed. While the person paying for the service certainly has the right to expect a specific outcome, an independent contractor generally has the right to decide how to arrive at the expected outcome. In the case of a nanny, consider things such as who determines how she will care for your child, where she will care for your child and if you have the right to dictate specific details of the job.
How to Decide
The common law rules for determining whether someone is your employee or an independent contractor look at the behavioral and financial aspects of the relationship as well as the type of relationship in general. Who controls the work and the business aspects of the job are important considerations. Benefits such as vacation pay as well as the presence or absence of a written contract are also important considerations. If you are still unsure whether your nanny is an employee or an independent contractor, the IRS can help you decide. Complete Form SS-8, Determination of Worker Status for Purposes of Federal Income Tax and Income Withholding (see Resources) and return it to the IRS. The IRS will review the form and provide you with an official opinion.