Tax question - We have an 18 yo as of 5/08. She is working for two people

[MJN]

as a babysitter and also does laundry/household cleaning/cooking. They both have told us they will report her earnings this year. She's making about $300-350 a week b/t the two. Does she need to be putting money aside each week to pay taxes? The places I worked like McDonald's took our taxes out, etc. so I have no idea how this works. One of the ladies is a nurse and she has a special account set up at work that she's paying dd out of. This is just for the summer, btw. She's working about 30-35 hours.

 

Thanks!

[Quiver0f10]

She will have to file both state and federal taxes, so yes, I would have her put some aside. If you go to the IRS web site I believe they have a calculator that figures how much self employement taxes she would have to pay and coupons to print in order to pay them quarterly if she wanted to do that.

[LizzyBee]

Go to http://www.irs.gov and search for household employee. If certain parameters are met, her employers are required to withhold taxes and issue a W-2.

[elegantlion]

Yes, self-employment tax can hit you hard if you are not prepared for it. I would make sure her employers are not supposed to doing withholding and then help her pay quarterly, if she is supposed to file self-employed. By help I mean greatly encourage her to pay quarterly.

 

Here's a link to Self-employment tax form

http://www.irs.gov/pub/irs-pdf/f1040sse.pdf

 

Just by doing the quick math, at $300 per week for 50 weeks her SE tax liability would be over $1000.00 for the year.

[MJN]

tax?

[elegantlion]

tax?

 

 

If you click on the form I listed, it's a PDF document, it will walk you through how much SE tax is owed. That doesn't take into account any tax already paid or any credits she might get from the 1040, but from years of doing my dh's taxes I'd say the amount you get on the form is a good estimation.

[magistramom]

You can get her in the habit of saving 28% of her check. At her age, and for the amount of time she works, that should cover all the state, fed, SS taxes. She may want to start paying quarterly too.

 

She needs to begin to itemize very carefully: car, tags, gas mileage, space in her residence where she stores her work items, space in her residence where she may work from, phone/internet, job flyers for publicity... a percentage of each can be declared for her businesses expenses on her tax forms. This will help offset her final tally for the IRS.

 

It's an education in itself. She'll be light-years ahead of most young adults her age if she learns/applies all of this now - and she probably will have great confidence to become a businesswoman on her own, someday soon.

[LizzyBee]

To calculate SE tax -

 

SE income x 92.35% x 15.3%

[LizzyBee]

http://www.irs.gov/publications/p926/index.html

 

Here is a link to the Household Employer Guide.

[PiCO]

If she's going to be paying taxes, I would recommend she raise her rates (if her employers have not started paying her more already.) She'll be losing about 30% of her income to taxes. Her employers are reporting her pay because they get a tax break. Her tax rate is less than theirs, so everyone should still come out ahead.

 

as a babysitter and also does laundry/household cleaning/cooking. They both have told us they will report her earnings this year. She's making about $300-350 a week b/t the two. Does she need to be putting money aside each week to pay taxes? The places I worked like McDonald's took our taxes out, etc. so I have no idea how this works. One of the ladies is a nurse and she has a special account set up at work that she's paying dd out of.

 

Thanks!

[MJN]

SELF employed? When I was reading Publication 926, it sounds like the people she works for are considered her employERS and should be taking out taxes and SS for her. This is a summer job working 20-30 hours a week, not something she'll be doing during the school year.

[plansrme]

Seriously, I am an employee benefits lawyer. If her employers are going to report her earnings, they need to treat her as an employee. There is no IRS agent under the sun who would agree that your daughter is an independent contractor, and thus self-employed, rather than an employee. The primary advantage to being an employee, for her, is that then the Er would pay the Er half of FICA and Medicare tax and unemployment taxes. If she is an independent contractor and thus self-employed, she has to pay both halves of FICA and Medicare.

The Er who is using her dependent care account to pay your daughter is cheating. The other Er, if she is not using her dependent care account but is going to report your daughter's income on a 1099 is also cheating, though not, perhaps, as much.

It is a royal pain in the behind to be the employer of a household employee and pay and withhold and report everything properly. You have to register with the state department of revenue, with the IRS, and you have to pay and withhold and issue pay stubs and W-2s. This is why most household Ers don't comply.

So what to do? Your daughter could agree to be an independent contractor, and pay SECA (the self-employed version of FICA) and estimated income taxes quarterly. This is not the true nature of the relationship, but if the IRS gets their money, they don't care. If she does not pay FICA and income taxes, and the Ers give her a 1099, the IRS will come looking for her, eventually. It may take 2 or 3 years, but they'll figure out that there's a 1099 for someone who didn't file a return. At that time, she can possibly get off the hook for the Er portion of FICA (the IRS will pursue the Ers), but she will still be on the hook for the Ee share and income taxes which, by then, will have accumulated interest and penalties. That approach will get both parties, Er and Ee, in trouble.

The third approach would be for no one to report anything, and for Er #1 to find another way to use her dependent care account.

FWIW, I am really annoyed by household employers who want to make sure their Ees pay taxes but don't want to take on the administrative and financial burdens of being an Er.

Hope that helps,

Terri

[MJN]

BABYSITTING JOB for goodness sakes! We're trying to figure out if it's all worth it or not. I'll let dh read your response as we ponder this.

[LizzyBee]

SELF employed? When I was reading Publication 926, it sounds like the people she works for are considered her employERS and should be taking out taxes and SS for her. This is a summer job working 20-30 hours a week, not something she'll be doing during the school year.

 

Exceptions from Pub 926:

 

4. An employee who is under the age of 18 at any time during the year. Exception: Count these wages if providing household services is the employee's principal occupation. If the employee is a student, providing household services is not considered to be his or her principal occupation.

 

This is the exception that made me think she might not be a household employee. If she was 18 the entire year, then yes, based on everything you posted, I would conclude that she is an employee and her employers should be withholding taxes and paying their share of fica.

[MJN]

this is a part time job. She'll be taking classes at the community college in the fall. So, does she need to report these earnings or not?

[LizzyBee]

this is a part time job. She'll be taking classes at the community college in the fall. So, does she need to report these earnings or not?

 

She does have to report the income. The real question is whether she is an employee or a self-employed independent contractor. Based on the fact that she was under 18 for part of the year AND her primary occupation is being a student, I think the people for whom she is babysitting are excepted from treating her as an employee. On a practical level, that means your dd will pay about 7.65% more in taxes than she otherwise would, so she needs to make sure she's being paid enough to make the jobs worthwhile.

 

As a self-employed person, she can deduct expenses related to the jobs, which will reduce the taxes she pays. She should keep a mileage log and her receipts for any snacks or toys she might purchase for the kids she's babysitting.

 

HTH.