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Nanny tax filings to be made simpler

Four times a year, Jennifer Proud Mearns does the right thing. She fills out the federal tax forms for the nanny who cares for her two young children.

Then she tackles the state and city filings and, finally, the forms to cover withholding from the nanny's paycheck. In all, four sets of paperwork each quarter.

"I'm already starting to get a headache thinking about filing at the end of this month," said Ms. Mearns, who works as a marketing executive in Manhattan. "It's a nightmare."

A bill intended to streamline the process, which was passed by Congress this month and is awaiting the president's signature, would ease the burden, though many argue it does not go far enough.

"It will alleviate a couple of forms quarterly," Ms. Mearns said. "It hits a lot of the problem _ it certainly doesn't solve it."

The bill comes a year and a half after Zoe Baird's nomination for attorney general was derailed by her failure to pay taxes for two household workers and after a public uproar for reform of the complex law.

Enacted in 1950, the existing law requires people who employ household workers to pay Social Security and Medicare taxes if the worker's earnings exceed $50 a quarter, or $200 a year.

The new measure would raise the threshold to $1,000 this year, with the figure indexed for inflation in future years.

More important, perhaps, the measure would streamline the filing process when taxes are owed. Employers would be able to report Social Security and Medicare taxes for any domestic help on their 1994 personal income tax returns, instead of filing separately each quarter. They could even list the withholding for employees on the same filing.

For some households, the most relief would come from a provision that exempts from Social Security tax any babysitters or domestic employees under 18 if they list their occupation as student.

"I was ecstatic when I heard that," said Maggie Doedtman, a tax specialist with H&R Block in Kansas City, Mo. "I was just on the verge of doing the paperwork for my babysitter, and she wasn't too thrilled. I think this deals with one of the bigger areas of confusion."

Irwin Treiger, a tax lawyer with Bogel & Gates in Seattle, called the measure a great attempt at simplification.

"Before, a lot of really intelligent people didn't know what their responsibilities were," he said.

Whether the changes would increase compliance or merely ease the pain for those who already comply is not clear. The IRS estimates that as many as three-quarters of those who should file do not.

Many people do not report a domestic worker's wages because the worker does not want to have to pay taxes on his income, said Stuart Kessler, a senior tax partner at Goldstein Golub Kessler & Company in New York.

The biggest hitch in the simplification effort is that state rules remain the same. For Ms. Mearns, that means filing New York state unemployment and city tax forms as an employer each quarter.

Although a provision in the bill encourages states to allow payment through federal returns, any modification will have to come from individual states.

Another point of contention is the new $1,000 threshold. Dan Mitchell, a tax economist at the Heritage Foundation who has a nanny, considers the threshold too low.

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