OVERVIEW A taxpayer who paid a household employee more than $1,400 in cash wages in 2003 most likely owes the nanny tax. Even if annual compensation is expected to be less than the threshold for withholding, tax should be withheld—the employer can later refund the withheld taxes if the worker does not meet the filing threshold.
DILEMMA The EIC is treated as a tax payment; any excess over the employee’s tax liability is refunded. Refundable credits can be significant and provide quite an incentive for an employee to report wages on form 1040. Employers may face the following additional costs in this situation:
SUMMARY For more information see the Tax Clinic, edited by Stefan Gottschalk, in the February 2004 issue of The Tax Adviser. —Lesli Laffie, editor
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