This Question Involves SCH H and I have never been able to get a clear answer. See Below

Question

Nanny Taxes were paid via the Payroll Services yet Sch H doubled up the tax as if it had never been withheld.  The Free Tax USA answer was to put the amount as an estimated tax payment; HOWEVER since the IRS never received the estimated tax, they could not verify the tax as paid and sent me a demand letter for the amount and in the end I just paid it, in effect paying the withholding twice.  I have Googled this issue and it is clear that it is an issue impacting various Tax Software products including TurboTax etc.

Further detail below including the original FreeTax reply.

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Subject: Nanny Taxes

blitz007   02/29/2024 9:45 AM

I used a payroll service to pay for a Nanny. I paid the service weekly for the nanny. As part of that payment, the service withheld fed and state taxes, social security and medicare. Yet Schedule H when completed seems to suggest that I owe all federal tax, social security and medicare for the nanny despite the fact that my payments also included her portion of SS tax, medicare and fed tax. Where do I input the taxes withheld as part of my payments? Is there some area of estimated taxes that I would input those amounts? I find the Sch H form incredibly confusing but what should one expect from the IRS. Thanks

Support   02/29/2024 12:37 PM

Hello,Thank you for contacting customer support! My name is Conroy and I will be assisting you today.For the taxes that you withheld, there are two paths in front of you. The one you take depends on if you have already paid the taxes that you have withheld or not. If you have paid the taxes that you withheld, you will enter the tax withheld amount on 2023 Estimated tax payments page which can be found under the "Misc" tab. You will enter the tax withheld amount in the quarter that you paid it in.If you have not paid the taxes that you withheld, you don't need to enter any other information, you will simply just need to pay the taxes on the amount that you unwithheld.If you have any questions, please don't hesitate to reach out to us again. Regards,ConroyCustomer Support

blitz007   02/29/2024 3:08 PM

Conroy, thank you very much for the quick and thorough reply. Much appreciated. Really pleased with the quality of support from FreeTax. Have a nice day.

AlexO · Accepted Answer

Redcatcher,

That is a great question!

Within the Schedule H instructions, the IRS does mention estimated tax payments as a way to avoid a penalty based on your household employment taxes.

When you received the letter from the IRS, did you provide records showing the payments made by the payroll services?

This could be an issue on the IRS' end with processing the payments and linking them to you. If you receive another letter like this in future years, I highly recommend providing the IRS proof of the payments made. You may need records from the payroll service for this.

CoryF · Accepted Answer

Thank you for continuing to ask for help.

I definitely want to assist you in moving forward. Your observation about the Schedule H is correct. By filing the Schedule H, you are telling the IRS that you paid cash wages to the Nanny and that all withholding must be reported and paid increasing your personal taxes. However, based on your original question, you show that you paid a payroll service to complete the wages part including withholding Social Security and Medicare taxes. The Payroll service should have filed the appropriate payroll tax returns and remitted the payroll taxes to the IRS. They then should have issued a W-2 to the employee showing the wages amount plus what was withheld in payroll taxes. You may want to confirm that the W-2 was issued by talking to the Payroll company or by talking to the Nanny. By reporting the same wages in a schedule H, you are reporting twice as much wages paid to the household nanny employee. This would explain the issue that the IRS had in seeing no Estimated taxes paid by you on the original tax return as the taxes were paid, but not by you. You shouldn't have filed the Schedule H on your original tax return in this circumstance.

The best way to proceed would be to Amend your taxes and remove the Schedule H from that tax return. This amendment would result in a refund since you said that you paid the taxes to the IRS.