Information and model client letter on the new "nanny tax" rules.

• Author: Horn, Anita L.

Several Clinton Administration nominations in 1993 brought into the national spotlight the issue of what is now commonly referred to as the "nanny tax." On Oct. 22, 1994, President Clinton signed into law a bill that simplifies how employers will report and pay Social Security taxes for their domestic employees.

While the AICPA was concerned with specific aspects of this bill, it endorsed the objectives of this legislation as introduced by Sen. Moynihan (D-N.Y.) (S 1231) and Rep. Jacobs (D-Ind.) (HR 4278), which updated and simplified the domestic employee payroll tax rules adopted in 1954. The AICPA then worked with the Department of Treasury and the IRS regarding its administrative concerns. To provide a workable solution, the AICPA requested that the legislation include the following:

* Provide for annual filing of Form 942, Employer's Quarterly Tax Return for Household Employees (for Social Security and Withheld Income Taxes), but not combined with Form 1040.

* Adopt the Senate provision for annual payment of the tax.

* Increase the currently antiquated wage filing threshold.

* Exempt domestic workers under the age of 18 from paying Social Security taxes.

The AICPA advocated having "nanny taxes" reported on a form other than Form 1040, to minimize the number of additional taxpayers who would now find it necessary to turn to outside preparers (probably not CPAs) for failure to comprehend their new obligations. For the last several decades, roughly half of all individual taxpayers have found it necessary to hire outside assistance to prepare their Forms 1040. The AICPA expressed its concern that incorporating payroll taxes for domestic help onto the Form 1040 would make that form even more complex (particularly when coupled with a requirement for estimated tax payments), and essentially force more taxpayers into paying to have their tax returns completed. The Treasury Department pointed out, however, that there has been significant noncompliance with Form 942 requirements, but that most affected taxpayers do file Form 1040. Thus, incorporating this tax onto Form 1040, beginning with the 1995 tax year, and having that form signed under penalties of perjury, will no doubt raise the compliance level for domestic employee payroll taxes. (The 1995 edition of the AICPA Tax Practice Guides and Checklists will incorporate the new reporting requirements into the Form 1040 checklist information.)

For 1994, the Service announced that Form 942 cannot...