Nanny living in the carriage house

[gb0248]

I have a client that bought a large property and decided to bring on a live-in

nanny for their three kids since daycare would cost $75,000.

The property has multiple buildings including an old carriage house that

they renovated and plan to let the nanny live in as part of compensation.

I’m assuming I should be grossing up compensation on the W-2 for reasonable

rent and utilities as a manual check component or employer loan.  I assume

it is a benefit subject to FICA and Medicare, and I’m sure state and local

want pound of flesh too.

I will assume I run rental of the building on Schedule E.  I’d assume it

may be a net-net lease only allowing depreciation since it is not truly

income generating.  They exceed $150K so derive no benefit but if paying

household employee tax on the adjustments compensation shouldn’t cause

reason to declare as income.  That just feels like double taxation and does

not feel right.

If anyone has thoughts or experienced such a goofy animal I’d love to hear

your thoughts.  I just hope they don’t decide to hire a priest to be the

nanny...

[qbteachmt · Accepted solution]

I think you have some reading to do:

https://www.irs.gov/taxtopics/tc756

https://www.irs.gov/publications/p926

https://www.irs.gov/publications/p15#en_US_2021_publink1000202325

https://www.irs.gov/publications/p15b#en_US_2021_publink1000193701

In general, you are going to need to understand their agreement better, as well. Is this a Rental operation, or Employee Lodging? Can the nanny live elsewhere, or is this part of the job?

[BobKamman]

Those are a lot of assumptions.  Did you make them staring at the ceiling, or looking out the window?

[gb0248]

They are about to begin the process of finding and hiring the nanny. 

The conversation started with "We just put $150K into renovating the carriage house, what can we deduct?"

I am trying to guide them into the best program they can do for themselves and their nanny, I definitely have reading to do.  

The closest I have found is someone let their employee "Homeless Joe" live in the apartment on top of the auto garage and he was available to take out the tow truck to get wrecks in the middle of the night.  They said they never thought it was handled right, never got straight answers because it was shady with too much cash and disengaged with the final straw being the client was always cleaning guns when they came over for quarterlies and the staff did not want to go.

I am looking for a story or example with a happier ending.

[gb0248]

Publications 926 and 756 do not define compensation. 

Other than army and clergy employee housing is not typical in my part of the country.

I am not sure if this is compensation or a fringe benefit and what taxes it may be subjected to.

It is not a discriminatory plan... the kids are on payroll of the schedule C and the household employee is on the schedule H.

It is a separate structure so it is not renting a room, but the property is not sub-divided.  There are 4 buildings on the estate.

YES I GOT MY ASSUMPTIONS OFF THE CEILING because I am approaching a problem with a SOLUTION not a PROBLEM and am hoping the community can say if it is correct, incorrect or if there are other things I should be considering.  I am trying to give enough facts to give the guidance as to where to look.

This is an industry we learn from mistakes, I'd rather learn from someone else's mistake than create m own.

[qbteachmt]

You can search the links I gave for "Lodging." Yes, the answers are there.

""We just put $150K into renovating the carriage house, what can we deduct?""

You get to include this as Basis against the future sale. There is no Deduction for improving property.

"I am not sure if this is compensation or a fringe benefit"

Or Neither...

"and what taxes it may be subjected to."

Or None.

"It is a separate structure so it is not renting a room"

Renting a Room isn't the same as calling this Rent, or for the convenience of the employer as part of the job. You seem focused on the property, not the relationship.

[gb0248]

The answers to my questions are best defined by Publication 15-B

Lodging on Your Business Premises

You can exclude the value of lodging you furnish to an employee from the employee's wages if it meets the following tests.

• It is furnished on your business premises.

• It is furnished for your convenience.

• The employee must accept it as a condition of employment.

Different tests may apply to lodging furnished by educational institutions. See section 119(d) of the Internal Revenue Code for details.

If you allow your employee to choose to receive additional pay instead of lodging, then the lodging, if chosen, isn’t excluded. The exclusion also doesn't apply to cash allowances for lodging.

On your business premises.

 

For this exclusion, your business premises is generally your employee's place of work. For example, if you're a household employer, then lodging furnished in your home to a household employee would be considered lodging furnished on your business premises. For special rules that apply to lodging furnished in a camp located in a foreign country, see section 119(c) of the Internal Revenue Code and its regulations.

For your convenience.

 

Whether or not you furnish lodging for your convenience as an employer depends on all the facts and circumstances. You furnish the lodging to your employee for your convenience if you do this for a substantial business reason other than to provide the employee with additional pay. This is true even if a law or an employment contract provides that the lodging is furnished as pay. However, a written statement that the lodging is furnished for your convenience isn't sufficient.

Condition of employment.

 

Lodging meets this test if you require your employees to accept the lodging because they need to live on your business premises to be able to properly perform their duties. Examples include employees who must be available at all times and employees who couldn't perform their required duties without being furnished the lodging.

It doesn't matter whether you must furnish the lodging as pay under the terms of an employment contract or a law fixing the terms of employment.

Example of qualifying lodging.

 

You employ Sam at a construction project at a remote job site in Alaska. Due to the inaccessibility of facilities for the employees who are working at the job site to obtain lodging and the prevailing weather conditions, you furnish lodging to your employees at the construction site in order to carry on the construction project. You require that your employees accept the lodging as a condition of their employment. You may exclude the lodging that you provide from Sam's wages. Additionally, since sufficient eating facilities aren’t available near your place of employment, you may also exclude meals you provide to Sam from his wages, as discussed in Proper meals not otherwise available under Meals on Your Business Premises, later in this section.

Example of nonqualifying lodging.

 

A hospital gives Joan, an employee of the hospital, the choice of living at the hospital free of charge or living elsewhere and receiving a cash allowance in addition to her regular salary. If Joan chooses to live at the hospital, the hospital can't exclude the value of the lodging from her wages because she isn't required to live at the hospital to properly perform the duties of her employment.

S corporation shareholders.

 

For this exclusion, don't treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but don't treat the benefit as a reduction in distributions to the 2% shareholder. For more information, see Revenue Ruling 91-26, 1991-1 C.B. 184.

Thank you qbteachmt

[qbteachmt]

Glad to help.

"employee housing is not typical in my part of the country."

This is common in my area; we have remote ranches, outfitting, ski resorts and private (exclusive) gated residential resort living with Staff on site. It verges on hostage conditions, sometimes 🙂

[BobKamman]

It took 30 seconds to find this in IRS Pub 926:

Don't count as wages any of the following items.
• Meals provided to your employee at your home for
your convenience.
• Lodging provided to your employee at your home for
your convenience and as a condition of employment.

It's not that employer-furnished lodging is unusual in your part of the country.  It's that clients with nannies are not usual in your practice.  Believe it or not, there are probably 100,000 American families with live-in nannies who have asked and found answers to this question.  By the way, if they spend another $50,000 to remodel the kitchen, that's not deductible either even if they hire a cook.  Nor $25,000 for the walk-in closets suggested by the butler and valet.