IRS Gives Relief to Child Care Providers with Assistants
Update: IRS has announced new relaxed rules.
Probably the biggest mistake family child care providers make is not following tax rules when hiring someone to help them in their business.
As I have written elsewhere, child care providers must treat such assistants as their employees, not as independent contractors. This means that if you hire someone to watch your daycare children, you must withhold and pay Social Security taxes, regardless of how little you pay the person!
In some states you will also owe state unemployment taxes and must purchase workers compensation insurance. If you hire someone on a regular basis, you will have to pay federal unemployment taxes as well.
Yet, some tax preparers advise child care providers to treat assistants as “independent contractors” and file Form 1099 Miscellaneous Income. Others say you don’t have to treat assistants as employees if you pay them less than $600 in a year.
Don’t listen to this bad advice! If you are audited by the IRS, they will not accept your claim that your assistant is an independent contractor. They will force you to pay back payroll taxes, interest, and penalties. This can add up to a lot of money.
Now for the good news!
The IRS has announced a new Voluntary Classification Settlement Program (VCSP) that will allow you (and other employers) to get right with the IRS. You must start treating your “independent contractors” as employees going forward. In addition, you will make a minimal payment to cover payroll taxes you may owe for past years.
In return, the IRS will not audit you for payroll tax issues for earlier years. As a result, you will avoid substantial costs of penalties and interest for not treating your “independent contractors” properly as employees.
To be eligible, you must:
* Have consistently treated your assistants as independent contractors, not employees
* Have filed Form 1099 for your workers
* Not currently be under an audit by the IRS
* Not currently be under an audit by the Department of Labor or a state agency about employees
If you are eligible, you should apply for this program by filing IRS Form 8952 Application for Voluntary Classification Settlement Program. I have written instructions on how to fill out this form.
If you are accepted into this program, you will owe just over one percent of the wages you paid to your assistants for the past year. (For example, you will owe $10.68 for every $1,000 wages you paid.) You will owe no interest or penalties.
The IRS will not audit you for payroll tax issues for your assistants for prior years. But, for the next three years, your tax return can be audited by the IRS up to six years later. (Normally, the IRS can only audit you back three years.)
You must apply for this program at least sixty days before the beginning of any tax quarter (April 1, June 1, September 1 and January 1).
If you are paying “independent contractors” to work in your business and are issuing Form 1099, this new program is a terrific deal!
I strongly recommend that everyone fill out this form on their own, or discuss it with your tax professional. The sooner you do this the better!
Thanks to Barbara DelBene (E.A.) for help with this article.
Tom Copeland – www.tomcopelandblog.com
Image credit: www.irs.gov
