Paying Money To Family Members

[lisac77]

Hey all. We're still in the process of investigating BK, but I have a quick question. My sister has been working for us for the last 2 years as a nanny. We've been bad and haven't been paying employer taxes and SS for her. Should we start? How will the trustee view us giving money to a relative every month?

[lrprn]

Hey all. We're still in the process of investigating BK, but I have a quick question. My sister has been working for us for the last 2 years as a nanny. We've been bad and haven't been paying employer taxes and SS for her. Should we start? How will the trustee view us giving money to a relative every month?

A few questions first...

Did your sister's nanny income exceed the annual threshold amount where you are required by law to pay Social Security and Medicare taxes for a household employee? ($1,500/year in 2006, but it can vary from year to year)

Has your sister been reporting the income she earned as your nanny the last two years on her federal, state, and local tax returns?

Did you withhold any federal income tax from her wages? (not required, just rounding out the picture)

[lisac77]

Yes she has exceeded $1,500, and no, she hasn't been paying taxes on it either. Of course, 2006 isn't quite over yet, maybe we could do a payment for the whole year.

[HHM]

Is the employment going to continue up to and through your BK?

In any event, you don't have to go to the trouble to pay the withholding, just issue her an IRS 1099 and let her declare it on her income tax. Since you are coming up on year end, you can do the 1099 in January for all of 2006.

If the money you pay represents significant outflows (and since it is more than $1,500 per year, so it is significant), you will want to document it via a 1099, and I am assuming you probably write a check, so the payments are in your bank statements (so the BK trustee will see the payments).

The other issue is just how much the means tests allows for child care?

[SinkingFast]

The other issue is just how much the means tests allows for child care?

You just fill in the average amount you spend monthly. There is no Schedules Allowable for ChildCare expense.

If you CYA yourself this year with the 1099 and Sis claims the payments as income on her taxes, you might be OK as far as your BK goes.

Just to be on the safe side, run this issue by your attny. Get his/her take on how this situation would be handled in your Court. Local Rules vary District to District and sometimes Court to Court within a District.

[lisac77]

We will probably be paying her until the BK so DH can wrap things up at the store and look for a job. We won't stop using her until she finds another job anyway.

We can pay our employer taxes on our 2006 tax return. Then she will get a W-2 or a 1099 (don't know which yet!) and have to pay taxes on her salary (I did an estimate, and it won't be too bad). That won't take care of 2005, but will they go back that far?

There is no limit on childcare on the means test for Texas. We can claim all the money we've been paying her.

[HHM]

There is no limit on childcare on the means test for Texas. We can claim all the money we've been paying her.

Then it will ultimately come down to reasonableness of the expense. If its in line with normal child care expenses for the area, then you are probably ok, if it is significantly higher, the US trustee may object to the amount. In any event, you will probably be ok, but it is something you will want to run by your attorney.

As for how far back they go, they do typically want to see 2 years worth of tax returns (and your required to file the most recent tax return as part of your BK petition).

[lisac77]

We pay her way less than you'd normally pay a nanny. The going rate for nannies here is 12-15 dollars an hour. We pay my sister $1100 per month. I don't see any way that they could object to us paying LESS than what nannies usually make.

We had to use a nanny because I work odd hours (evening shift 3-11 PM). I think we'll be OK.

[CindyLou]

All the trustee will want to know is the amount. If you have the receipts of payment I doubt they will even ask about the tax status or relationship of the person you are paying. If you list it as "childcare" the BK court will not know the difference between that and if you are giving the money to a daycare. Bk is seperate from IRS. My opinion is that it will not be an issue. But if you feel better then do the 1099 for 2006 and don't worry about 2005.