When a business hires employees, they can write off the full cost of the workers because the money paid to employees for work is taxable income. This helps maintain the “income should only be taxed once” rule. If the business can’t deduct the cost of employees then it would be paying them with after tax dollars. Then the employees gets taxed on the money again. Good for the government, bad for everyone else.
When I hired a nanny to help Sarah take care of Sally, I had assumed that I would be able to deduct the cost because the nanny would be an employee and the money I would pay her is subject to income tax. However, it seems Canada has some different rules when it comes to hiring “domestics.”
The current deduction limit for childcare is $7,000 per child. This is supposedly enough to put your child in daycare so your wife can go back to work. Apparently, this $7,000 also extends to hiring a live in nanny. I pay the nanny a lot more than $7,000 a year. However, I can only deduct $7,000 of the cost. On top of all this, I have to match her CPP (Canada Pension Plan) deduction, match her EI (Employment Insurance) by 140%, withhold her income tax and remit the full amounts every month to federal government. That makes me an unpaid tax collector.
My nanny needs to pay income tax on the full amount I pay her. So I have to pay my nanny with after tax money (once it passes $7,000) and my nanny has to pay tax on that money as well. Double tax! It would actually work out better for the nanny if I pay her under the table after $7,000 but that would be illegal. A few of my friends had asked why not just include the nanny as an employee for TTZ Media and deduct the full cost. Because that is illegal too. I will just chalk this up to another example of “unfairness” in the tax system.
Does the US allow full deduction on the cost of domestics?
Did you enjoy this post? Get John Chow Dot Com updates via email...
Stay up to date with all of John Chow’s tips for making money online and blog posts by subscribing via email. Your email will be kept private and never shared with anyone.
One of the most common complaint (or excuse) I hear from potential new bloggers is they don’t know how to install WordPress. Terms like FTP and CPanel are like a foreign language and setting up a database might as well be setting up the space shuttle for a launch. Because of the technology barrier, many would-be bloggers never start their blogs...
{ 72 comments }
You could always outsource to Sri Lanka or India.
Hahah. I was thinking the same thing. That video was great.
The one they did on Time’s Least Influential Americans was pretty good too.
Where Did you get those info?
Like a phone nanny?
Sounds like you need to move to the U.S. John. You can come live with me.
U.S is very near Canada ……
John Move to U.S
Can he bring a personal assistant?
John,
While I was reading this, all I could think of was: isn’t there a way to challenge this?
It’s clear that the nanny is your employee, and as such should be treated as one, so doesn’t the existence of that $7000 cap become a case of discrimination by CRA? I’m not getting why certain jobs would be different from other jobs.
I’m not well versed enough in tax law to know what the options would be, but something there seems ripe for a legal beagle to earn his stripes on!
I think the furthest he will move to is Seattle or else he will lust for the food in Vancouver.
How would hiring her as an employee of TTZ Media be illegal? Or more to the point how would the government know that wasn’t just another employee?
Just curious that’s all
And, what happens if he were to be audited? Then, the government would find out, he’d probably be heavily fined, and CNET would start calling him the World’s Second Most Hated Blogger.
I don’t know enough about Canadian employment law so could be sounding stupid here but if he’s audited then the accountants see another name on the payroll? Can’t he employ her as a cleaner but assign her other duties? I guess what I’m trying to get at is why the hell do the governemnt care what type of work she is doing and then treat her differently? Just seems a bit mental to me.
$7,000?? Wtf.. i wanna be a nanny in canada lol
$7,000 is the childcare deduction. A live-in nanny will cost $18,000 to $35,000 a year.
Including living expenses and accommodation?
If it doesn’t that’s way too expensive.
Plus living expenses. You can save money by importing a nanny from the Philippines.
7000/year limit rite?
$7,000?? is high………
Not sure how much in malaysia
i believe that will be less than 3x of that amount JC is talking.
Maybe..No idea with that
I believe in the past several Congressmen figured out how to avoid paying taxes on “domestics.”
They hired illegal immigrants.
That sounds very similar to the rules in California. I haven’t gone through it myself just yet, but I think a friend told me you don’t have to pay taxes if they don’t work in your home (in his case, the kids went to the babysitter’s house).
You need to move to the US. Or the Cayman islands.
Pay fair taxes, if you pay them at all.
One Man. One Year. $100,000 online. To buy a tax-free island.
http://www.oneyeargoal.com
He could always buy and move to Sealand.
How much are they asking for that thing now?
According to Wikipedia, about $998 million USD.
I’m glad adsense provided the link for “nanny taxes made easy.” My prayers have been answered!
From my understanding, in the US the nanny could be regarded as an independent contractor, thus subject to the self employment taxes, which generally do not require the person who hires the contractor to collect taxes or anything. It would all be up to the nanny to report the taxes to the state and IRS.
Even if he were to do that, he would still not be able to write off the full amount of her salary… assuming that I understand this correctly. John would be able to avoid the confusion with income tax, CPP, EI, and all that though.
although I think if the private contractor’s income exceeds $600/year then the employer needs to report the income so the IRS makes sure the contractor is reporting taxes properly.
Yes, but it doesn’t require the employer to withhold taxes, which can be quite a pain. All they would have to do is file I think its called a 1099?
You should pay for her services but not the CPP or EI. That should be on her end and she would ask more from you. If you are going to pay her CPP or EI, it should be tax once and considered like a business.
With all your recent posts, you should create another blog or even better,a political party to lower my taxes and simplify things. Can I be your vice prime minister?
As an employer, you are required to match your employee’s CPP (100%) and EI (140%) contributions. You are not paying their CPP or EI, you are matching it to 100% and 140%. That’s the current law.
Unless you get her to be an independent contractor. Then she pays 0% EI and 9% CPP (both the employer and the employee) portion.
There are tests to decide if she is a contractor or employee. If the nanny lives with you, it’s nearly 100% that she will be classed as an employee.
I agree, make her pay CPP and EI.
As well, I’m not sure, but you may be able to deduct it under anoter area. I’ll have to check my 2007 tax act tonight.
I don’t see why you can’t pay her under the table, no one would ever know!
Maybe he does but you obviously don’t write that you’re doing something illegal on a blog
Yeah, never a good thing to do…
You mean like a certain blogger that was facing foreclosure?
Ya….No one would ever know…….
Wow, that’s really weird! I would just deduct it as a business expense.. in the U.S. that would be logical.
What about starting another business and hiring her as an employee that way?
Start a Nanny business!
man its life, just quit bitching!
honestly, this is how life is setup, so live with it, and it seems your doing pretty good for yourself so chill!
Get your Nanny to write a blog about her experiences as a
Nanny, and hire her as your (title:) Blogger. In order for her to research articles for her blog, she looks after your kids……..
Subsequently… she gets paid for the blogging and not for looking after your kids. If you have a good relationship with her (I’d assume so if she’s a full-time Nanny) then that shouldn’t be a problem getting sorted out.
Just an off-the-cuff idea but as you can see there are definitely LEGAL ways around things all the time, it’s just a matter of how much you’ll be saving because of it.
You can try to spin it anyway you want, but the the CRA has a series on tests to decide if someone is a domestic. Believe me, once you see the test, there’s no way around it. http://www.labour.gov.bc.ca/esb/domestics/brochure.htm
Sucks, have you asked an accountant about this? Sometimes there are things that most people don’t know about.
It was my accountant who told me I couldn’t write off the full cost of hiring her!
That’s so lame. Last year, we spent about 6k on a woman who was running a daycare in house, kinda. She had our daughter and one other baby. Anyway, when it came time to do taxes, we were planning to 1099 her, and she wouldn’t give up her social. Still working on it now.
DevDad
I’m just gonna rewind a bit and ask, why not skip with all this confusion and scrap the nanny?
I thought one of the biggest benefits of running TTZ and this blog was that you had lots of time to spend with your family and that Sarah didn’t even have to work?
Hiring nanny’s to take care of your kids are for those stuck “trading hours for dollars”.
Sarah doesn’t work. However, that doesn’t mean I cannot hire help for her to take care of Sally. People who trade hours for dollars generally can’t afford to hire a live-in nanny. They use daycare.
Wow. Canada sure does work a heck of a lot differently than England…
Steve
The government allows companies to hire daycare workers for their employees while a domestic is considered to be a live in. What you do is have your house liscensed for daycare and hire daycare workers for your employees. Now if you ever expand your employee base you have an in office daycare provider as a service for employees.
You also hire the daycare worker as a part time in house nanny. paying her $7000 a year. Just because an employee of your company also works part time for you doesn’t mean that they fall under a single employee or domestic legal status. When she takes care of you employees children she works for your company. When she gets off of work and goes to her part time job as a nanny in the evenings as a nanny she is a part time domestic for you and not affiliated with your company at that point.
As an employer you are not responsible for what your employees do with their free time. They can freelance or work a second job if they want to. From your perspective you are getting customized daycare through your company during the day and have a part time nanny in the evenings. The person working for you gets 2 pay checks, like lots of people in north america do.
Hiring daycare workers to take care of employee’s children creates a taxable benefit to the employee.
Not exactly your most interesting post John, but it’s curious to see how everybody still has something to say. You could really experiment with this, posting some really offbeat stuff to see how people react.
Anyway, I’m reminded of the movie Mr Nanny. Pretty bad movie that.
Peace.
Do you pay more tax if the nanny is hot?
Now this has got me thinking.
OK, enough of that.
Indirectly, you bet your ass!
DevDad
Hey John, I recently just signed up for Bluefur hosting under your coupon and I’m liking it so far
I was going to sign up for BlueFur, but ended up going with MediaTemple.net. It’s totally scalable, on the fly.
DevDad
Sweet bejeezas, tax laws are complex over there. And to think I was planning a move to Canada with the missus. Think I will stay in Thailand and bear with the 7% income tax and nothing else
http://www.bangkokdiaries.com – Expat tales from the “Big Mango”
You should totally be able to write off the whole thing. That is very wierd
If you were really evil you would start a nanny service as a business and then claim the losses as legitimate expenses.
He could but would need to have one year of profit. Otherwise, it will be in big troubles.
You can’t claim losses every year in Canada. You must prove that your goal is to make a profit. I think it’s 5 years in row of losses maximum. It may had changed.
You could run it for 5years close it down and then open a new business.
Even if we think the gov is dump, they are not that dump and will see the pattern and ask for back taxes. The company must prove the intent on making a profit.
John, the 7k that you can deduct is claimed under the lower income spouse. So if Sarah isn’t working, then the 7k claim won’t amount to very much tax savings. There are other tax benefits of having a child though, there’s the spousal amount, Canada child tax benefit, universal child care benefit, and the new $2000 federal tax credit that just started at the beginning of July.
For more info, i’ve explained the details in this article:
http://www.milliondollarjourney.com/spousal-amount-uccb-and-cctb.htm
There really isn’t a way around it. You cannot deduct it as a business expense.
http://www.cra-arc.gc.ca/E/pbg/tf/t778/t778-06e.pdf
There is the form from the CRA, people should read it before we get any more half-baked ideas.
I like this post John. I just started working from home in order to avoid daycare costs, and to spend more time with my little girl. Kudos sent in the form of a $10 beer.
DevDad
Well, ‘
Canada does have a big, big, government, so..
with that comes big, big, taxes..