New nanny tax rules mean more responsibility for return preparers.

• Author: Gracik, L. Michael, Jr.

The "nanny tax" rules require more from return preparers than just an inquiry as to whether a client has paid domestic workers $1,000 or more and filling out Schedule H; as discussed in this article, it may invoke a host of other Federal and state tax and nontax filing requirements. The effect of the new law on administrators, executors and trustees is also addressed, as are preparer penalties that may apply when the preparer omits preparing Schedule H.

The Social Security Domestic Employment Reform Act of 1994 (the Act) attempts to simplify the rules relating to employment taxes and income tax withholding for household employees. The Act makes two major changes in the rules applicable to household employers: [] Effective for wages paid in 1995 and thereafter, there is mandatory calendar-year basis reporting and payment of (1) Social Security and Medicare taxes under FICA, (2) the tax imposed under FUTA, and (3) any withheld income tax. [] Effective for wages paid in 1994 and thereafter, household employers are not liable for FICA taxes for any household employee to whom the employer pays less than $1,000 during the year.

Starting in 1995, the Act also provides an exception from FICA, taxes with regard to cash wages paid for domestic service in a private home of the employer performed in any year by an individual under age 18 during any portion of such year (provided the service is not the employee's principal occupation).

Also beginning in 1995, household employers no longer file Form 942, Employer's Quarterly Tax Return for Household Employees, the return for reporting and paying FICA and withheld income taxes on such workers. Instead, employers will report these taxes on new Schedule H, reproduced on pp. 86-87, which is to be filed with their individual income tax returns. FUTA taxes will also be reported on Schedule H.(1)

Additional Filing Requirements

Although the Act simplifies the reporting and paying of FUTA, FICA and withheld income taxes, CPAs should review with clients other Federal and state filing requirements that apply to hiring household workers. Penalties may be assessed against a client for failing to comply with such requirements. Some of the forms and requirements are as follows: [] Form 1-9, Employment Eligibility Verification, used to prove an employee's identity and eligibility to work for purposes of U.S. immigration law. This form is not required for domestic work in a private home on a sporadic, irregular or...