Test Return #4

[Jesse]

I come up with a refund of $2,154.

[Larmil]

I got $2,154.

[Bees Knees]

We already established that any answer giving the client a recovery rebate credit is wrong.

Thus, so far, we have the following answers:

• $2,471
• $2,130
• $2,154

Does anyone wish to change their answer? Does anyone else want to vote for one of the above? Are there any other possibilities?

[DonPriebe]

Ok - I'll try ...

That's a first for me. $2,154.

The good news is that no one answered $2,885!

[S T]

My

Answer is $ 2,154 refund

Sandy

[Earl]

I too figure a refund of $2,154.

[outwest]

Refund

amount is $2154

[JSLATER]

Refund of $2154.

[Bonnie]

I say 2471.

[spanel]

I got $2471.


chris

[Bees Knees]

And the answer is…

Refund = $2,154

Form 1040 line by line:

Line 7 = $70,750
Line 37 = $70,750
Line 40 = $10,900
Line 42 = $14,000
Line 43 = $45,850
Line 44 = $6,079
Line 48 = $0
Line 52 = $2,000
Line 56 = $4,079
Line 60 = $317
Line 61 = $4,396
Line 62 = $6,550
Line 73a = $2,154

Explanation:

Line 48 – The dependent care expense credit is not allowed. TTB page 11-6 under requirements for the Child and Dependent Care Expense Credit says:

3) Work-related. Expenses must be for care provided so the taxpayer and spouse can work or actively look for work.

Our scenario said the following:

Betty works her part time job in the evenings after Bob comes home from work to watch the kids.

They also pay a 19-year old neighbor girl named Kathy to come over to their house from time to time to watch the kids during evenings and weekends when Bob and Betty decide to go out to eat and for other social events.

To qualify for the credit, the child care expense must be so that Bob and Kathy can go to work, not go out to eat and socialize. Thus, the child and dependent care expense credit is not allowed.

Line 60 – Kathy is a household employee. TTB page 14-1 says:

Taxpayers with household employees must file Schedule H to report FICA tax, FUTA tax, federal income tax withholding (if any), and advance earned income credit payments (if any). Schedule H is filed with the taxpayer’s Form 1040.

Household employees. Employees hired to perform work in or around taxpayer’s home. Examples:

• Babysitters age 18 or over.
• Cleaning people.
• Housekeepers.
• Nannies.

If the worker usually provides his or her own work tools and offers services to the general public, he or she is an independent contractor and is not a household employee. See Independent Contractors, page 5-21, for more information.

There is a weak case to be made that Kathy is an independent contractor and therefore Schedule H is not required. However, in my opinion, the evidence much more heavily leans towards household employee. TTB, page 5-22 says the following:

…the general rule is a worker is an independent contractor if the business that hires the worker has the right to control or direct only the result of the work and not the means and methods of accomplishing the result. In contrast, a worker is a common-law employee if the business that hires the worker has the right to control what will be done and how it will be done. The key factor centers on who has the right to control the details of how the services are to be performed.

Bob and Betty obviously have a great deal of control over how Kathy performs her job. She is required to do the babysitting in Bob and Betty’s home, at specific times and specific dates.

TTB, page 5-22 mentions other factors that indicate Kathy is an employee:

Employers generally control when and where work is to be done…what workers to hire or to assist with the work…what work must be performed by a specified individual…

Bob and Betty hire Kathy to do the work. Kathy cannot in turn send out someone else to do the actual babysitting, nor can she take the kids to her place of business to do the work. This is a factor indicating employee status.

Employees generally are guaranteed a regular wage and work for an hourly fee or a salary. Independent contractors are generally paid a flat fee for a specific job. Exceptions apply to some professions, such as accountants and lawyers who charge hourly fees for their services.

The variable rates that were paid to Kathy on various dates indicate Kathy is paid by the hour; a factor indicating employee status.

Employer-employee relationships generally continue indefinitely.

The babysitting service performed by Kathy is not a one time job. It is continuous and regular throughout the year; a factor indicating employee status.

Extent services performed by the worker are a key aspect of the business hiring the worker. A worker who is key to the success of a business is more likely to be controlled by the business, which indicates employee status.

Kathy is key to the success of the activity. Without Kathy, there would be no babysitting services.

TTB, page 5-22 also mentions factors that may indicate Kathy is an independent contractor:

Extent to which the worker makes his or her services available to the public. Independent contractors are generally free to offer their services to other businesses or consumers. They often advertise and maintain a visible business location.

This is the best argument to make in our scenario that Kathy is an independent contractor rather than a household employee. It is an argument I may have at one time tried to use with my own clients. But I think it is a weak one at best.

Kathy does not really offer her services to the general public. It appears her activity is limited to performing services for friends and family. Kathy is a full time student, which is her main occupation. There is no indication that she advertises to the public, has a separate business location, or actively seeks to find new customers. It is casual part time work that she does to pay her way through college, similar to her McDonald’s job as an employee.

I think we tend to take the position that a worker is an independent contractor, unless the IRS can prove the worker is an employee. The IRS takes the position that a worker is an employee, unless the employer can prove the worker is an independent contractor. In the literature that I have read on the subject, the IRS has a very high percentage rate of victory concerning this issue. Given the fact that preparer penalties have increased for taking positions with a low chance of success, I would think twice about sticking my neck out over this issue by insisting my client hired an independent contractor.

At the very least, if I was going to take the position that Kathy was an independent contractor, she should give a business card to Bob and Betty advertising her services as a professional babysitter; she should bill Bob and Betty for her services with an invoice; and she should have a written contract with Bob and Betty spelling out the terms of the arrangement, including a statement that Kathy is an independent contractor, responsible for her own self-employment tax on compensation received.

Thus, in my opinion, the factors indicating employee outweigh the factors indicating independent contractor. Thus, the household employee rules apply to our scenario.

Calculations on Schedule H:

Assuming Kathy is in fact a household employee of Bob and Betty, Schedule H has several factors that must be addressed:

1) Is FUTA tax required? No. TTB page 14-1 says the following under the FUTA requirement:

The taxpayer paid cash wages of $1,000 or more in any calendar quarter.

Adding up cash payments to Kathy throughout the year, there is no single quarter during the year in which total cash wages equals $1,000 or more. Thus, FUTA does not apply.

2) Is FICA tax required? Yes.

TTB page 14-1 says the following under the FICA requirement:

The taxpayer paid a household employee cash wages of $1,600 or more in 2008.

Adding up cash payments to Kathy for the year, the total = $2,070. Thus, FICA applies.

3) Is FICA gross-up calculation required? No.

Cash payments to Kathy are even dollar amounts, indicating that Bob and Betty did not withhold FICA from Kathy’s wages at the time of payment. Thus, Bob and Betty are required to pay Kathy’s share of FICA as well as their own employer’s share of FICA.

Normally, when an employer pays the employee’s share of FICA, that amount is also considered wages to the employee, subject to FICA. However, there is an exception for household employees.

IRS Pub 926, page 5 says:

Not withholding the employee’s share. If you prefer to pay your employee’s social security and Medicare taxes from your own funds, do not withhold them from your employee’s wages. The social security and Medicare taxes you pay to cover your employee’s share must be included in the employee’s wages for income tax purposes. However, they are not counted as social security and Medicare wages or as federal unemployment (FUTA) wages.

Example. You hire a household employee (who is an unrelated individual over age 18) to care for your child and agree to pay cash wages of $100 every Friday. You expect to pay your employee $1,600 or more for the year. You decide to pay your employee’s share of social security and Medicare taxes from your own funds. You pay your employee $100 every Friday without withholding any social security or Medicare taxes.

For social security and Medicare tax purposes, your employee’s wages each payday are $100. For each wage payment, you will pay $15.30 when you pay the taxes. This is $7.65 ($6.20 for social security tax + $1.45 for Medicare tax) to cover your employee’s share plus a matching $7.65 for your share. For income tax purposes, your employee’s wages each payday are $107.65 ($100 + the $7.65 you will pay to cover your employee’s share of social security and Medicare taxes).

Thus, although Bob and Betty issue a W-2 to Kathy showing $2,228.36 in Box 1 wages ($2,070.00 cash payments + $158.36 employee’s share of FICA paid by employer), Box 3 and 5 wages for FICA purposes is $2,070.00.

Anyone care to disagree with my answer? Explain.

[nalawson]

I would have to disagree with Kathy being a household employee. She did not have regular hours each week, just when they called her. Other than being there, there are no specific intructions on her duties as a baby sitter. She also babysat for the general public in her neighborhood. Kathy would need to file sched C with her tax return... : ) thats how I interpret the situation.

[Bees Knees]

IRS Pub 926 says:

Do You Have a Household
Employee?

You have a household employee if you hired someone to
do household work and that worker is your employee. The
worker is your employee if you can control not only what
work is done, but how it is done. If the worker is your
employee, it does not matter whether the work is full time
or part time or that you hired the worker through an agency
or from a list provided by an agency or association. It also
does not matter whether you pay the worker on an hourly,
daily, or weekly basis, or by the job.

Example. You pay Betty Shore to babysit your child and
do light housework 4 days a week in your home. Betty follows
your specific instructions about household and
child care duties. You provide the household equipment
and supplies that Betty needs to do her work. Betty is your
household employee.

Household work. Household work is work done in or
around your home. Some examples of workers who do
household work are:

Babysitters
Caretakers
Cleaning people
Domestic workers
Drivers
Health aides
Housekeepers
Maids
Nannies
Private nurses
Yard workers

Workers who are not your employees. If only the
worker can control how the work is done, the worker is not
your employee but is self-employed. A self-employed
worker usually provides his or her own tools and offers
services to the general public in an independent business.
A worker who performs child care services for you in his
or her home generally is not your employee.

If an agency provides the worker and controls what work
is done and how it is done, the worker is not your em-
ployee.

Example. You made an agreement with John Peters to
care for your lawn. John runs a lawn care business and
offers his services to the general public. He provides his
own tools and supplies, and he hires and pays any helpers
he needs. Neither John nor his helpers are your household
employees.

The pub says nothing about irregular hours giving you independent contractor status.

Plus, the pub’s example of an independent contractor in the child care profession mentions the worker providing the services in his or her own home, not the customer’s home.

[Snaggletooth]

Real world comments

As Bees has pointed out in your previous tests, the answer depends on the information presented in a textbook environment, and real-life preparation is often different.

Client would just tell us they have paid a "babysitter." If both spouses worked, I probably would not counter with a question as to why, or whether it was for social conviviality or so that both spouses can work. I will admit that I probably should, but I suspect most of us do not.

Also, clients who would produce a date "log" showing amounts paid by date are really few and far between. Before I knew whether to asses FUTA, technically I would have to know the statistical parsing of these payments, and the clients would simply not have this ready.

They also most likely wouldn't know when the babysitter turned 18. Clients can be sitting in front of you on April 12th and tell you accurately they know she is 19, but it is possible she turned 18 in the very early part of the year.

Issuing a W-2 for the amounts paid PLUS the FICA is absolutely correct, but I've never seen one with the FICA added.

Bees has done a good job thus far presenting all the relevant facts in these tests. The facts presented are fully-sufficient to develop a textbook answer. Some of us have had problems trying to read in additional facts which are not given, and we are told to simply assume that all the facts involving taxation are already given in the example and not to drag in factors not previously defined.

These are good and worthwhile exercises.

[Larmil]

I would have to disagree with Kathy being a household employee. She did not have regular hours each week, just when they called her. Other than being there, there are no specific intructions on her duties as a baby sitter. She also babysat for the general public in her neighborhood. Kathy would need to file sched C with her tax return... : ) thats how I interpret the situation.

If Kathy filed an SS-8 based on the information given she would certainly be classified as an employee.