Question: I have a question for you Ralph. I took a job as a babysitter for a family on the other side of town. They just told me that they intend to take a deduction for the money they paid me. How does this impact me?
Answer: I get this question at least a few times per day. You have a complicated situation. When you decided to go to work for this family, you probably assumed that this would be some extra money to put in your pocket. The families decision to take a deduction for the money they paid you has complicated the situation. So here's what we have. First of all, you were an employee of the family and they should have set you up as a "household" employee. They should have paid you with normal payroll checks and taken the appropriate taxes from your wages. I would suspect they probably considered you an "independent contractor," but I can assure you that this is not the case. Since you are working at their home, with their children, using their toys, etc., you are not a contractor. I would guess you don't have a business license, business insurance, etc., as well. You are an employee and now you find yourself in the situation where all of the money that was paid to you is income reportable on your personal tax return. You will now be responsible for not only the federal and state income tax, but also the self-employment tax burden on this income. In other words, you had better plan on taking 45% of the money you earned and put it aside for taxes.
If you are still in this "work" relationship, I would suggest you have a clear discussion with the family and explain to them that you are an employee and you expect to be treated as such. It is their responsibility to handle your payroll taxes and provide you with the appropriate documentation. If they are interested in having someone assist them with the payroll function, we can certainly help.
For more information about this issue and other tax related issues, contact Ralph V. Estep, Jr., of Saggio Accounting+PLUS at 302-659-6560 or visit our website at www.saggioaccounting.com. We will help you navigate the payroll process and provide you with advice in these somewhat complex issues.