Your shoppers with family assist — corresponding to nannies, housekeepers and senior caregivers — could also be paying their staff by a cellular app like Venmo or PayPal. It’s fast and simple, however because of a brand new tax-reporting rule, it could now not be a good suggestion.
What’s new this yearUnder the American Rescue Plan Act (ARPA) handed in March 2021, paying for items and providers — like babysitting or childcare — by third-party settlement organizations (like Venmo, PayPal and Money App) will probably be reported to the IRS if these transactions whole $600 or extra in a 12 months.
The concept behind the requirement is to make extra transactions reportable so it’s tougher for companies to underreport their taxable revenue by utilizing apps to get round banks and different conventional types of reporting revenue.
Whereas the intent of the rule is geared toward companies, family employers and their staff want to know the implications.
If a family worker exceeds that $600 threshold for funds made by cellular apps, they may get a Kind 1099-Ok subsequent January. Beforehand, a 1099-Ok would solely be issued if somebody had at the least 200 transactions price a mixed $20,000 or extra.
Kind 1099-Ok is an IRS informational tax kind used to report funds obtained by a enterprise or particular person for the sale of products and providers that have been paid through a third-party community, also known as a TPSO (Third-Get together Settlement Group) or credit score/debit card transaction. The IRS requires TPSOs, corresponding to PayPal and Venmo, to challenge a Kind 1099-Ok, which reveals the entire quantity of funds obtained from a TPSO within the calendar 12 months if a buyer meets the $600 threshold quantity.
It has all the time been a requirement to report revenue when web earnings from self-employment exceed $400. ARPA simply broadens the reporting of tax data to the IRS.
This rule went into impact on Jan. 1, so the private tax returns due this April is not going to be affected.
The right way to advise your shoppers
Your shoppers with family assist ought to keep away from utilizing cellular cost platforms to pay their staff.
Receiving a 1099-Ok at tax time will trigger confusion as nannies and different family staff ought to obtain a Kind W-2. Your shoppers may additionally fall out of compliance with home employee safety legal guidelines of their state that will name for pay stubs to accompany their staff’ pay. Utilizing a cellular app for cost and skipping the required paystub could possibly be a labor legislation violation.
The most effective methods for you or your shoppers to pay their family staff are by direct deposit or with a paper verify.
Purchasers paying ‘off the books’
You might have shoppers with family assist who’re paying their staff “off the books” to keep away from employment taxes and wage and labor legal guidelines. Beforehand, paying a employee below the desk by a cellular app didn’t go away a lot of a paper path and should have been a viable technique to illegally make use of a nanny. Now, the brand new tax-reporting rule provides cellular app funds to a rising checklist of how a consumer can get caught illegally paying their nanny.
Family staff ought to all the time be paid “on the books” to keep away from vital fines and penalties when paying illegally and for the advantages and protections supplied to staff.
With cellular app funds now closed off to unlawful work preparations, now could also be a good time to get these shoppers paying their staff legally both by your agency, on their very own, or by a payroll service.
Understandably, you doubtless have no idea about these shoppers so it’s possible you’ll want to tell your buyer base, or the households you recognize with younger kids who could make use of a nanny, concerning the new tax-reporting rule and the implication it has on “off the books” pay.
Paying a babysitter
Paying the occasional or date evening babysitter is totally different from using a nanny. A babysitter has irregular hours and should not make greater than the nanny tax threshold ($2,400 in 2022). It might nonetheless be OK to your shoppers to pay babysitters with a cellular app. However these childcare suppliers ought to know this revenue will doubtless be reported to the IRS and would must be reported on their private tax return.
In case your consumer’s babysitter is often paid by a cellular app, they could be requested to supply their Social Safety Quantity or Particular person Tax ID Quantity to proceed utilizing that platform and be paid for his or her providers.
The IRS will have the ability to cross-reference each the third-party community report and the one issued to the babysitter.
Utilizing ‘private’ transactions to pay for providers
Because the new reporting rule solely applies to funds obtained for items and providers, why not simply pay a babysitter or nanny as a private transaction as in the event that they have been a member of the family or good friend?
When utilizing PayPal or Venmo, customers can tag their transactions as both private (when reimbursing or gifting family and friends) or items and providers (when buying an merchandise or paying for a service).
Paying again a good friend or sending cash to a member of the family as a present will not be topic to the brand new tax-reporting guidelines.
Nevertheless, if a consumer is paying their babysitter or nanny on a constant foundation, these common transactions will increase purple flags, and the cost platform could name into query whether or not they have been really made to a member of the family or good friend. PayPal, which additionally owns Venmo, says it’s going to monitor accounts to make sure that private funds will not be getting used for gross sales of products and providers. If utilizing a cellular app, your shoppers ought to all the time pay their babysitters as service transactions.