Many American households employ a nanny or other worker to help at home, but this type of employer-employee relationship poses tax issues since it is easy to avoid complying with the rules regarding compensation. Household-employers may not have followed the conditions that require them to withhold and pay Social Security and Medicare taxes if a worker receives $1800 or more in a year. Since that has often occurred in recent years, the IRS is attempting to encourage compliance by easing penalties for taxpayers who have not followed the rules in prior years. One way to do this is through the Voluntary Classification Settlement Program, which allows employers to avoid interest and penalties for previous years and reduce their total tax bill. Financial advisers try to keep informed of their clients’ personal situations in order to advise them how to properly comply with the tax rules if they are employing workers who fall into the category covered by the “nanny tax” and associated rules. However, many household-employers are unaware that they need to disclose their household employees for tax purposes, or they are simply trying to avoid the rules and pay the workers under the table. Lack of payment can have extreme consequences, such as the failed nomination of Zoe Baird for U.S. Attorney in 1993. The nomination was pulled after discovering that she did not pay the nanny tax, bringing this issue to light for the first time and creating the foundation for the IRS to eventually find a way to end the existing loopholes.
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