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?