The Baltimore Sun

Plenty of us worry about making mistakes on our taxes.

And when high-profile taxpayers stumble so publicly, as President Barack Obama's nominees have recently, it often makes the rest of us think back to past tax returns and whether we did everything right.

Granted, taxes are confusing. But you never want to be on the wrong side of the IRS. Because as we have seen, it eventually can catch up to you.

So, just in case the Obama administration throws your hat in the ring, here's how to avoid some mistakes of past nominees:

Nanny taxes: These are the payroll and unemployment taxes employers must pay once their domestic employees' income reaches a certain level. Despite the name, nanny taxes apply to all sorts of workers, such as drivers, maids, private nurses, housekeepers, health aides and yard workers.

Many of us initially heard of nanny taxes when President Clinton's first nominee for attorney general bowed out after the revelation that she didn't pay taxes for her nanny and driver, both undocumented workers.

Political appointees continue to slip up over nanny taxes. Nancy Killefer, who dropped out last week as Obama's nominee for chief performance officer, had a tax lien on her house a few years ago for failure to pay unemployment taxes for a housekeeper. She has paid the tax and penalties.

Paying nanny taxes protects low-income workers who don't have the extra dollars to set aside for retirement or the loss of a job. Even so, many employers ignore the tax.

"People are on a budget, and nanny taxes cost real dollars," says Arthur Ellis, president of the Nanny Tax Co. in Chicago, which handles nanny taxes for employers. Others figure they won't get caught.

And household workers often play along.

"If they are making $12 an hour and just getting by, who has room for taxes?" Ellis says. "So they are very willing to be part of the underground economy."

When a worker is an employee: Taxes can only become an issue if you are an employer. It's often hard for people to understand when those helping in and around your house become employees, says Susan Huddy, vice president of Gaithersburg accounting firm Costello & Huddy Chartered.

The key is how much control you have over what work is done, along with how and when, she says. If you exert all the control, you're an employer. Say you hire a person to regularly clean your house, giving specific instructions on how to do so and providing the cleaning supplies, Huddy says. In that case, you're an employer.

You're not, though, if you hire a maid through an agency that sends a different person each time, leaving you with less control, she says.

Your minor children doing household chores aren't employees, even though you control them. And other youngsters under age 18, like a baby sitter, generally aren't employees, Huddy says. Check out IRS Publication 926 for more details.

Worker status: It's up to you, too, to make sure your employee is working legally here. You and your employee must fill out a Form I-9, which you keep for your records. (A minor embarrassment for Treasury Secretary Timothy Geithner was that he employed a housekeeper whose legal immigrant work status lapsed for a few months in 2005.)

Payroll taxes: You will have to pay Social Security and Medicare taxes if you pay a worker $1,700 or more this year. You and the employee are each supposed to kick in 7.65 percent of the worker's pay. Frequently, though, employers pay the full 15.3 percent of the payroll tax for household help, tax experts say.

Unemployment taxes: These state and federal taxes pay for unemployment benefits for laid-off workers. Marylanders will owe these taxes if they pay a worker $1,000 or more during a quarter.

The state unemployment tax rate this year for Maryland employers ranges from 0.6 percent to 9 percent on the first $8,500 of your employee's income. The rates are up from last year, reflecting rising unemployment claims, Huddy says.

The rate you pay depends on how many of your employees filed claims and how much the state paid out to them, Huddy says. Industries with larger layoffs, like construction, pay higher rates, she says.

The federal unemployment tax rate is 0.8 percent of the first $7,000. The federal rate is higher if you don't pay state unemployment taxes.

Worker insurance: You may have to buy workers' compensation insurance to cover medical expenses and lost wages if a household worker is injured on the job. Requirements vary by state. In Maryland, you must buy coverage if you pay a worker $1,000 or more during the quarter.

Many times, your existing homeowners' policy will add a rider to cover the worker.

Other employer paperwork: You will need an Employer Identification Number, available online from the IRS. You must give your worker a W-2 form. And you must report payroll and unemployment taxes on Schedule H when you file your return.

"It is a lot of work. That's why there is so much noncompliance," Huddy says.

Indeed, it might be easier to hire help through an agency that pays the appropriate taxes for workers.

Years ago, my husband and I hired a maid and discovered while doing our taxes that we triggered the payroll tax. We paid the tax but decided to switch to a cleaning service that takes care of the taxes for its employees so we wouldn't have to worry about this.

Huddy says to double-check that the agency pays taxes for its workers.

Taxes on perks: Former Cabinet nominee Tom Daschle had to amend his return after failing to pay taxes on the use of a car and driver provided by a business pal.

Perks or services from someone you have a business relationship with are almost always taxable income, says Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants. Health insurance is one of the few exceptions.

If you work for a company, your employer will usually report any taxable benefits as income on your W-2 so you don't have to worry, he says.

But if you're an independent contractor or consultant, it's up to you to report this. Generally, any perk worth more than $25 from a business associate should be reported as income, Ochsenschlager says.

where they went wrong

Timothy Geithner

Failed to pay $34,000 in self-employment taxes until nominated as Treasury secretary. He was confirmed.

Tom Daschle

Withdrew as nominee for health and human services secretary. Recently amended tax returns to pay more than $128,000 in back taxes and interest, mostly for the free use of a car and driver for three years.

Nancy Killefer

Withdrew as nominee for chief performance officer. Had a $947 lien on her home in 2005 stemming from unpaid unemployment taxes for a housekeeper. She paid the debt a few months later.

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