REQUESTS FOR YOUR TAX ID
By Tom Breedlove – Breedlove & Associates
Many families ask for their agency’s “Tax ID” (they may refer to it as an “Employer Identification Number” or “EIN”). Until this year, the answer was always a simple “no” because families were not allowed to apply agency fees toward their childcare tax breaks.
Now the answer is not quite so simple. New tax laws allow families to count placement agency fees as a childcare expense. Despite this new law, the vast majority of families should use their own EIN on their taxes.
WHY IS AN EIN REQUIRED WHEN TAKING A TAX BREAK?
1.) Families are allowed to take the childcare tax credit on their federal tax returns, or to utilize dependent care accounts (also known as a “flexible spending account”) administered by their companies. The employer’s EIN must be provided for those breaks. In permanent and temporary placements, the caregiver does not work for the agency that placed her - she works for the family that employs her. Therefore, all wages should be applied to the family’s - not the agency’s - EIN.
2.) In late 2007 the IRS ruled that agency placement fees are a deductible childcare expense. However, in most cases, itemizing a placement fee is of no benefit because the nanny’s wages already exceed the childcare expense limit.
The exception: temporary placements (and permanent placements made late in the year, i.e. November or December), where wages fall below the expense limit. In those cases, the agency’s placement fee MAY create a tax benefit for the family.
ALLOWABLE CHILDCARE EXPENSES:
* A nanny’s gross salary (not net)
* All employer taxes (over and above the gross salary)
* Fees paid to a daycare, preschool or day camp (overnight camps do not qualify)
* Fees paid to a placement agency
SHOULD PLACEMENT AGENCIES PROVIDE THEIR EIN?
Our advice is NOT to give out your EIN unless you are absolutely sure it is only being used to itemize your placement fee. If your EIN is erroneously applied to a nanny’s wages, your agency will be viewed as the employer and you will have a paperwork mess and considerable liability.
We advise a three-step approach:
1.) Ask the employer if they filed state and federal employment tax returns on the nanny. If they did, they should have their own Household Employer EIN. If they did not file state and federal employment tax returns, they are not in compliance with employment law and cannot itemize employment-related expenses.
2.) For those who have paid legally and still want your EIN, we advise you to try to analyze their employment situation. If they’ve exceeded the expense limit in wages ($3,000 for one child; $6,000 for two or more children) itemizing your placement fee will have no tax benefit. If they had a temp(s) or hired late in the year, they may be below the expense limit and able to deduct your placement fee.
3.) For those who have paid legally AND fall below the expense limit, it’s probably safe to provide your tax ID. However, to avoid misapplication of your EIN, we recommend requesting a copy of your client’s completed Form 2441 (the form upon which your Tax ID will be applied). Make sure only agency fees are tied to your Tax ID. Do not under any circumstances let them tie your EIN to the nanny’s wages!
It takes a little effort to fend off clients - and even CPAs - who are prone to misapply your Tax ID. But it’s worth your trouble. Protecting your EIN will save you lots of time and money down the road. The old adage “an ounce of prevention is worth a pound of cure” definitely applies here.
