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Simplifying taxes: What senior caregivers need to know about the payroll and tax process

March 6, 2019

When you take on a job caring for a senior, you probably don’t have the benefit of working with an HR department to address questions about payroll. As a household employee, if you’re making more than $2,100 annually, you must have taxes withheld from your pay, and your employer owes taxes to the IRS on those wages. For caregivers who aren’t familiar with the ins and outs of payroll and how you and the family are supposed to handle those taxes, we’ve laid out four topics to familiarize yourself with before your first day of work.

Topic #1: How to differentiate between gross wages and net pay

When a family makes you a compensation offer, it’s critical that you’re clear as to what your gross wages and net pay will be, because your benefits are calculated based on your gross wages. “Gross wages” refers to the amount of money you earn prior to taxes being withheld, while “net pay” is the amount you’ll actually put in your bank account. Net pay is often referred to as “take-home pay.”

Ideally, the family has made you an offer in terms of gross wages, but it’s important to clarify whether this is the case. If it isn’t, the family can use a paycheck calculator to translate the net pay into gross wages so that taxes are accurately calculated and tracked. This is also crucial for the family, because all compensation must be reported to the IRS and state tax agencies in terms of gross wages.  

Topic #2: How to choose the correct number of allowances on Form W-4

Before you begin working, the family should ask you to fill out a Form W-4 so they know how much in income taxes to withhold from you. They may also ask you to fill out a state withholding form if you live in a state with income taxes.

You’ll notice these forms ask you to declare a certain amount of allowances. Allowances represent factors in your life that are used to estimate approximately what your tax obligation will be. The goal is for you to have exactly the right amount of taxes withheld each pay period so you essentially “pay as you go” throughout the year and eliminate the possibility of a huge tax bill at the end of the year.

However, because there are so many factors that affect personal income tax liability, it is impossible to manage this expectation with absolute precision. In fact, the IRS says taxpayers should allow for error of up to $500 — meaning you may get a refund of a few hundred dollars or you may be required to make a tax payment of a few hundred dollars. If you don’t like the idea of writing a check at the end of the year, you should be conservative when you choose your allowances. A lower number of allowances (0 being the lowest) will slightly lower your paycheck each payday, but that means you’ll get more back at the end of the year. Conversely, a higher number of allowances will increase each paycheck, but that means you’ll owe more at year end.

Most people start out very conservative because they’d rather see a larger-than-expected refund than have to make a larger-than-expected payment. Once you have a tax history, it is easier to get closer to a “zero balance” by adjusting the number of allowances on Form W-4 to withhold a little less or a little more each pay period.

Topic #3: How to handle taxes at the end of the year

Once your payroll is set up properly, you won’t have to worry about anything until the end of each calendar year. Your employer will send the taxes they withhold from you to the state and federal tax agencies throughout the year. By the end of January, when the tax year is complete, your employer will provide you with Form W-2. It itemizes your gross wages for the tax year, along with all your federal and state tax withholdings. This will give you plenty of time to get any additional paperwork organized by the time the April 15 tax filing deadline hits.

Note: If you terminate your relationship with the family during the tax year, it is your job to make sure they have your current mailing address so they can send your W-2 to you in January.

Topic #4: How properly handling taxes can benefit you down the road

Along with preparing your W-2, your employer is also filing documents with the Social Security Administration on your behalf. This will credit your earnings record, which will directly affect how much you are paid during retirement. The greater your earnings record, the more potential income and medical assistance you’ll receive in your golden years. Additionally, the family is paying unemployment insurance taxes throughout the year, so if you’re let go due to no fault of your own, you’ll be eligible for benefits while you look for another job.

Read next: Can caregiving for your parents get you a tax break?

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