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'Nanny Tax' Could Trip Up More Taxpayers This Year

Should you be worried about the dreaded “nanny” tax?While the growing gig economy implicitly treats service providers as independent contractors, fami

Should you be worried about the dreaded “nanny” tax?

While the growing gig economy implicitly treats service providers as independent contractors, families who hire people to watch their kids, clean their houses, or perform other household tasks need to make sure they don’t inadvertently run afoul of regulations this year that classify them as employers with wage and tax obligations.

For people looking to hire workers, the lure of getting a service performed cheaply could come with an expensive downside if they inadvertently take on an employee, then wind up having to pay back taxes or penalties.

“What’s new this year that a lot of families need to be aware of is Department of Labor issued new guidelines on who is an employee and who is an independent contractor,” said Tom Breedlove, director of HomePay.

Last summer, the IRS added two factors to a test for worker classification, Breedlove said, one pertaining to permanence and the other evaluating how much of their income is provided by you.

For the 2015 tax year, families who paid someone $1,900 or more over the course of the year to come into their home and perform jobs like personal assistance, cooking, cleaning or taking care of kids, elderly parents or even pets had to withhold and pay taxes, because that worker is considered an employee who must be paid hourly. For 2016, that amount goes up to $2,000. With recent minimum wage increases taking place in a number of states and municipalities, families are more likely to hit that threshold sooner.

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“There used to be a gray area, [but] the DOL and IRS have really, really tightened the definition," Breedlove said. "They’ve essentially said all household workers should be treated as employees,” he said.

There also is more awareness on the part of workers about their rights, said Guy Maddalone, founder and CEO of GTM Payroll Services. More are seeking out legal advice, and more attorneys are advertising their services to represent domestic workers.

“Six states have legislation that secures the rights of domestic workers, and five of those have full bills of rights,” Marzena Zukowska, spokeswoman for the National Domestic Workers Alliance, said in an email. These laws generally spell out (among other things) requirements for tax-related compensation topics like minimum wage and overtime pay.

Along with stricter rules, the government today has a better chance of catching up with people who misclassify the people who do work for them. Since people now have to be able to prove their income to obtain subsidies for Affordable Care Act health insurance, there is less incentive for childcare, eldercare and other domestic workers to want to get paid off the books, and an additional opportunity for the government to spot discrepancies between reported incomes.

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The rub is that while the stakes are higher, experts say a shift in the way service providers connect with the people they work for has created a knowledge gap that can leave people unaware of who they need to classify as an employee and when.

Maddalone said the rise of "gig economy" platforms is disrupting the traditional agency placement model for domestic workers.

"Their business is shrinking," he said, as more workers turn to sites that connect buyers and sellers of services but don't offer any guidance about worker classification or labor law and tax obligations. "The advice is not getting out there."

"All those sites and boards have really disrupted the ability of the local expert in the community [to] let them know there’s certain laws here," Maddalone said.