How do I report my wife's nanny income on tax returns?

But doesn't the family that employed her have an obligation to provide a W-2 and pay employer taxes? I thought nannies were supposed to be treated as household employees with proper tax withholding and everything.

Yes, you're absolutely right. The family should have treated her as a household employee, provided a W-2, and paid their share of employment taxes. This is often called "nanny taxes" and many families aren't aware of these obligations or choose to ignore them. However, regardless of what the employer should have done, your wife still has an obligation to report her income. The IRS won't penalize her for the employer's failure to provide proper documentation, but they do expect all income to be reported. Unfortunately, many household employees end up in this situation where they have to report income without having received the proper tax forms.

Did they help with the payment plan too? I'm in a similar situation with back taxes and I'm freaking out about having to deal with the IRS directly.

How accurate is their service for this kind of situation? Like, will they just make educated guesses or do they actually help you build a case that would stand up if you got audited?

They definitely helped me understand my payment plan options, though I ultimately had to set it up directly with the IRS. The guidance they provided made the process much less intimidating since I knew exactly what to ask for and what documentation I needed. As for accuracy, they don't just make guesses. They help you build a reasonable reconstruction of your income based on whatever records you do have - bank statements, deposit patterns, text messages about payments, etc. They showed me how to document my calculation method, which is important if you ever get questioned about it. It's not about making up numbers, but rather creating a well-supported estimate based on the partial information you have.

Wait, how does this actually work? Do they just dial continuously for you or something? Seems too good to be true considering how impossible it is to reach the IRS.

I'm skeptical. Aren't there scams out there pretending to be IRS intermediaries? How do you know this is legit and not just trying to get your personal info?

They use an automated system that navigates the IRS phone tree and waits on hold for you. When an actual IRS representative answers, their system connects them to your phone. So instead of you waiting on hold for hours, their system does it for you and only calls when there's a live person ready to talk. Regarding legitimacy concerns, I completely understand being cautious. They don't ask for any tax information or personal details - they just need your phone number to call you when an agent is on the line. You're still speaking directly with the IRS, not with an intermediary. The service just helps you bypass the hold time. I was skeptical too, but after waiting on hold for 3+ hours multiple times and getting disconnected, I was desperate enough to try it and it actually worked.

Yeah, it was definitely an informal arrangement. I hadn't thought about how reporting it might affect them. I'll reach out to her cousin and see if we can figure this out together. I just want to get caught up without creating problems for anyone else. Do you think there's a statute of limitations on the household employment taxes they might owe? This was back in 2018 so it's been a while now.

For the IRS, the statute of limitations is generally 3 years, but it extends to 6 years if there's a substantial underreporting of income (25% or more). Since this involves employment taxes, the cousin's family could potentially face penalties for not filing Schedule H and paying household employment taxes. If I were in your shoes, I'd definitely have that conversation with them first. One potential approach is to just report the income as "miscellaneous income" on Schedule 1 rather than specifically as nanny or household employee income. This reports your wife's income without explicitly triggering household employment tax implications. While technically not the perfect solution, it might be a practical compromise for an informal family arrangement from years ago. Remember though, I'm just sharing what I've learned from my own experience - each situation is unique and has its own considerations.

This is actually a common misconception. If she was working as a nanny in someone's home, following their schedule and rules, she would be classified as a household employee, not self-employed. Household employees don't pay self-employment tax. Instead, the family that employed her should have paid Social Security and Medicare taxes (the employer portion) and withheld the employee portion from her wages. They should have reported this on Schedule H with their tax return and given her a W-2. But since that didn't happen, she would just report the income as "other income" on Schedule 1, which isn't subject to self-employment tax. She would only pay regular income tax on this amount.

Oh that's a huge relief! I've been reporting babysitting money as self-employment income and paying that extra tax for years. So if I'm caring for kids in their home and following their schedule, I'm actually a household employee and not self-employed? How would I fix my past returns then?

Yes, you're likely correct about being a household employee! The key test is whether you're working in their home, following their schedule, and they control how you do your work. If so, you're their employee, not self-employed. To fix past returns, you'd need to file amended returns (Form 1040X) for any years within the statute of limitations (generally 3 years). You'd remove the self-employment income from Schedule C and instead report it as "other income" on Schedule 1. This should eliminate the self-employment tax you've been paying. However, keep in mind that your employers technically should have been paying their share of Social Security and Medicare taxes too. When you amend, you might want to consider whether this could create issues for them, similar to what @Makayla Shoemaker is dealing with regarding her cousin s'family. You might want to consult with a tax professional to make sure you handle the amendments correctly and understand all the implications before filing.