Nanny wants to be 1099 not W2: legality??

[WorkingToUnwind]

Our nanny recently asked to be switched from a W-2 employee to a 1099 independent contractor. She would like to deduct her expenses which include mileage and other expenses related to her car such as work she has had done on it. She also often supplies the kids with lunches from her home. We have offered to pay her mileage in the past but she has always declined. She likes to pick the kids up and bring them to her house, which we are comfortable with, but it's about a 25 minute drive. We've always said that there's plenty of food in our house and she doesn't have to feed them but she insists that she likes to feed them at her house. She also will take them on excursions that are an hour away. Again, nothing that we have a problem with, but it does use up a lot of gas. Recently she has said that she really needs to be switched to a 1099 position or it's just not going to be feasible for her going forward. We're having a conversation with her about it soon. From our standpoint we always thought the W-2 position was better for her because it means she doesn't have to play self-employment tax. Our accountant has also advised us that nannies are typically considered W-2 employees because they work within the home. He did say that an argument could be made for her to be 1099 since she watches the kids in her own home quite a bit. However I think that would mean she'd have to be an in-home daycare. Does anybody else have any experience with how they classify their nanny? We're planning to just offer her additional money each month to cover expenses but she seems really dead set on being a 1099.

[GilesMM]

Follow your accountant's advice.  For 1099 the nanny would need to be independent, possibly looking after other kids, providing all her own supplies, possibly working at her own facility rather than your home, etc.  If you don't have good documentation as to the facts, especially as you would be switching, the IRS may assume you are avoiding taxes and press the issue.

[ixtap]

I wonder if she is coming up against a benefits cut off so that you giving her a raise would only exacerbate the issue, whereas making business deductions might help significantly.

Does she care for other children on weekends or evenings or whatever? It doesn't have to be every day, but if she does it regularly, that would change the picture.

[WorkingToUnwind]

Follow your accountant's advice.  For 1099 the nanny would need to be independent, possibly looking after other kids, providing all her own supplies, possibly working at her own facility rather than your home, etc.  If you don't have good documentation as to the facts, especially as you would be switching, the IRS may assume you are avoiding taxes and press the issue.

Yes, that's what we're understanding too.

[WorkingToUnwind]

I wonder if she is coming up against a benefits cut off so that you giving her a raise would only exacerbate the issue, whereas making business deductions might help significantly.

Does she care for other children on weekends or evenings or whatever? It doesn't have to be every day, but if she does it regularly, that would change the picture.

She's married and her husband makes something like 250-300k/year. I don't think she is obtaining any benefits. Her income from us has always been just for her fun money. I don't understand what they're planning to deduct that would offset the self employment tax she'd have to pay.

She doesn't ever care for other children.

[Metalcat]

Unfortunately you can't just switch someone from being an employee to being an independent contractor unless something about the business relationship substantially changes.

And you would be the one penalized, more than her. At least where I live that's what would happen.

[maizefolk]

She's married and her husband makes something like 250-300k/year. I don't think she is obtaining any benefits. Her income from us has always been just for her fun money. I don't understand what they're planning to deduct that would offset the self employment tax she'd have to pay.

She doesn't ever care for other children.

Only given that high a household income perhaps her goal is to be able to shelter income in a solo 401k or SEP IRA? These would be options open to contractors but not to W2 employees.

[WorkingToUnwind]

Thanks all. We spoke with her and her husband today and they agreed she'd continue to be a W2 employee. I do wonder if @maizefolk is onto something with the solo 401k or SEP. I wish we could have her as a 1099 independent contractor. It would save us a ton on taxes and paperwork and help her out. Alas.

[blueberrybushes]

At one point in my past, as treasurer of a non profit, this question came up and I asked our accountants.  The gist of the conversation is this: 

If your nanny is doing this work only for you, she should be getting a W-2.  if she performs the same work for other clients, she could be considered an independent contractor.  The key point being that she is performing the same work for others - and not simply her family.

I also suggest you review what the IRS considers for an independent contractor - easy to google.  This is what appears on the IRS website:

"The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done."

Maybe this will help....

[NorCal]

You’re clearly in the grey area on 1099 vs W2. In practice you should be fine going the 1099 route. The real risk is your nanny coming back and saying she should have been classified as W2. That doesn’t seem like a big risk here.

I’ll throw out another option if you want to be conservative and stick with W2.  Come up with a process for her to submit expense reports. You can reimburse her for the expense of food and trips, and she doesn’t have to deal with self-employment taxes on that money.

[WorkingToUnwind]

The funny thing is, we've offered to reimburse her for mileage and expenses in the past and she's said it's no big deal and essentially isn't worth the hassle. Whenever she does excursions we give her cash for admission fees. When we met with her yesterday we told her we'd just start automatically giving her $75/month for gas and other expenses. She thought that was nice. I wonder if she and her husband were hoping to be able to take a home office deduction or something.

[GilesMM]

The funny thing is, we've offered to reimburse her for mileage and expenses in the past and she's said it's no big deal and essentially isn't worth the hassle. Whenever she does excursions we give her cash for admission fees. When we met with her yesterday we told her we'd just start automatically giving her $75/month for gas and other expenses. She thought that was nice. I wonder if she and her husband were hoping to be able to take a home office deduction or something.

Why not just ask?

[leejam86]

Correct way would be to W-2. 1099 is when one business pays another business. You don't 1099 people for personal expenses. The nanny tax is a specific exception.

If you 1099 you are asking for trouble at some point in my opinion.