How to Hire a Nanny During COVID-19

How to Hire a Nanny During COVID-19

As those with children at home are well aware, the COVID pandemic has greatly changed childcare in 2020 (and potentially beyond). Many schools are no longer meeting in person, thousands of daycare centers have closed, and generally speaking most families’ “normal” child care setup has been drastically altered. Not only do many families have to watch their children now that they are home, but they are expected to guide them through their school curriculum and still perform at their day job remotely. 

Some families that pay for childcare have saved quite a bit of money since the pandemic since they no longer are paying the recurring childcare bill (for the time being). I recently had a conversation with some clients that are expecting a baby. The costs of childcare, of course, came up. Unless your family is in the fortunate situation of having one spouse stay-at-home or have extended family in the area to help care for your children, you are probably going to have to pay child care costs. A lot. “A lot” as in nearly the amount of a second mortgage in many cases. I’ve mentioned how expensive it is to raise children in a past blog post.

Instead of focusing on the fact that childcare is expensive, let’s focus on strategies to help reduce some costs, have more flexibility, and (potentially) be an alternative childcare option for those that are worried about how daycare centers etc. are handling their COVID-19 procedures and the exposure to more children. Additionally, we will outline how to go about hiring a nanny and some considerations that come along with that decision. Remember, I’m not an epidemiologist, doctor, public health figure, or the like. Rather, I’m your friendly neighborhood financial advisor that has simply received input from clients informing me that they like the idea of hiring an in-home nanny for multiple reasons: one of which is more control of who their child is coming in contact with in this COVID era. 

If my family decides to hire a nanny, where do I begin? 

First and foremost you will need to find someone that has demonstrated caretaking qualities, is trustworthy, and aligns with your family’s values. You should interview several candidates. You can find candidates through Care.com, local “Mom” groups, or by simply asking others in a similar life stage that are already in your network. If you are going to do a “nanny share”, where you and another family (or two) collectively find a nanny to watch your children as well as the other family’s children. Ideally you find a family that you get along with and have similar or complementary schedules. Joining a nanny share can considerably cut your costs, especially if you have additional children. For example, if you have one child and are paying $300/week for that child to go to daycare, your second child could very well double your weekly payment to $600/week for both children! With a nanny share, it is expected that you should give your nanny a pay increase when you have additional children, but it isn’t expected to double their pay. 

OK, we found a trustworthy nanny, now what?

I would recommend “doing it by the book”, and formally establishing an entity to pay your nanny. This means legally paying your nanny. To be more clear, this means not paying them cash under the table! I believe that there is a social obligation to your nanny when you hire them. Some of these responsibilities include withholding taxes for them and paying into unemployment. By formally reporting wages for your employee and paying into Social Security, you provide earnings history (in case they apply for a loan, for example) as well as help them earn Social Security credits. In the situation where you need to layoff or furlough your nanny, paying into the Unemployment Insurance program will allow them to collect unemployment benefits. During Safer-at-Home orders, many families furloughed nannies. Assuming they are eligible, your nanny can receive some sort of income through the state unemployment program during their furlough. 

You are considered a Household Employer and your nanny is considered a Household Employee. Many simply establish a sole proprietorship in their name. This is the easiest route but could potentially expose you to more liability (vs. establishing an LLC, for example. You may want to discuss this with an attorney as I cannot give legal advice). You will have to register for an Employer Identification Number (EIN) online through the IRS. One thing that is overlooked is for the Household Employer to have their nanny complete an I-9 form to show that their employee is authorized to work in the United States. 

I have my EIN, how do I handle taxes and unemployment insurance?

You will have to register your Household Employer through the state. If you pay your nanny more than $2,200 in gross wages to your nanny in 2020 (or $1,000 in any calendar quarter), you are required to withhold and pay Social Security, Medicare, and Unemployment Insurance taxes (see the IRS Household Employer Tax Guide). In Wisconsin, there are a couple of steps to do this. For Unemployment Insurance, you register through the Department of Workforce Development (DWD). You will also need to complete your Business Tax Registration through the Department of Revenue. One common misconception is that your nanny is a 1099 employee; this is not true! Your nanny is a W-2 employee. You should have them complete a W-4 form upon their hire (and associated state form, like Wisconsin’s WT-4) for withholding. 

When it comes to paying taxes, you will have to submit your nanny’s wages on a quarterly basis in Wisconsin. A common mistake is to submit your quarterly Unemployment Insurance payment to the Department of Workforce Development and neglect to submit your quarterly payment to the Department of Revenue, or vice versa. You need to complete both of these items every quarter. If you are a sole proprietor, you account for your nanny’s federal income taxes withheld taxes when you file your annual tax return, via Schedule H. A good habit is to automatically put your nanny’s withheld amounts in a savings account, knowing that you will have to submit those taxes at some point. You could also withhold an additional amount from your personal wages to help account for any extra taxes that might be due when you file your tax return. 

Now that I’m an employer, what risks are involved?

Being an employer with an employee exposes you to some risks. You should definitely consider a Workers Compensation Policy to protect you and your family in the case of your nanny getting injured or ill while on the job. Become familiar with the laws in your state, as some states require Household Employers to procure a Workers Compensation Policy. The State of Wisconsin does not require you to have a Workers Compensation Policy. 

How do I pay my nanny?

The mode of payment isn’t necessarily as important as tracking your nanny’s gross wages, taxes withheld (federal, state, Medicare, Social Security, etc.). For example, paying them by physical check or even Venmo is fine. I would highly recommend using a software such as NannyPay or HomePay. This will make it much easier for you to track and report quarterly wages to the state, generate a year-end W-2 for your nanny, or provide them with paystubs. 

What else should I be on the lookout for?

Review options through your employer’s benefits package that might give you a tax break. I’m specifically thinking of a Dependent Care FSA. Most families that hire a nanny will pay their nanny more than $5,000 (the maximum a married filing jointly couple can contribute to a Dependent Care FSA in 2020) in a given year, you might as well take full advantage of using an FSA so you can pay a portion of child care expenses income tax free. Work with your accountant to see what other tax breaks might be available to you, such as the Child or Dependent Care Tax Credit.

Have I talked any of you out of hiring a nanny? Seems like a lot of work, doesn’t it? It can be more work and more responsibility, however speaking from experience I think it is actually quite manageable. I know that my family (and some of my clients) have saved money by going the nanny or nanny share route. If this is something that you would like to learn more about, please reach out to me! I can give you my perspective as a financial advisor as well as my personal perspective since my family has decided to choose a nanny share setup over daycare. 

Mitch DeWitt

 

The Winding Road to a Universal Fiduciary Standard (Or Not)

The Winding Road to a Universal Fiduciary Standard (Or Not)

When one visits the doctor, it gives great comfort to know that the physician has taken the “hippocratic oath” to do no harm, and always put the patient’s needs first. If a specific treatment option, prescription, or advice were given because a doctor had been financially incentivized to do so, it would be a betrayal of that oath. It would erode trust, and irreparably harm the doctor-patient relationship. In financial services, however, there is no hippocratic oath. Over the past few years, we have seen efforts to delineate who is actually a fiduciary and what the responsibility of an advisor is to their client. Here, we take you down a review of what has transpired out of the recent regulatory changes and how it may impact financial professionals and their clients in the future. 

Investment Advisers Act – The Beginning

The Investment Advisers Act of 1940 established regulations on investment advisers. It states who needs to be registered with the Securities and Exchange Commission (now firms with over $100 million in assets under management), as well as the role and responsibilities of investment advisers to their clients. Current regulations have been built on top of this legislation in an attempt to modernize how advisers interact with their clients, as well as the expectations of a certain level of care and limits to conflicts of interest.

DOL Fiduciary Rule – The First Attempt

In 2015, President Obama made it clear that he supported rulemaking that required retirement advice to follow a fiduciary standard. His administration tasked the Department of Labor to develop a framework to establish rules, which involved an extensive amount of feedback from financial advisors, the general public, and the regulators. Out of this came the DOL Fiduciary Rule in 2015, to be implemented in 2016. The rule required advisors to disclose any financial compensation from outside sources due to their recommendations, put their clients’ needs first in all advice, and seek to avoid conflicts of interest. This included receiving commissions, 12b-1 fees (trails paid by mutual fund companies to the advisor or firm), receiving “referral fees” and required any fees collected to be a “fee for service” or an “asset management” fee that was not dependent upon the advice rendered. 

This had a potentially massive impact on 401(k) plan advisors, which were not required to be fiduciaries on their plans previously if they accepted commissions and were acting as “registered representatives” (in contrast to fee-only investment advisors, who must act as fiduciaries). Additionally, the DOL Fiduciary Rule was supposed to impact IRA assets as well, which are not covered by ERISA. This was a major bone of contention, as the Department of Labor was essentially regulating a type of asset over which it arguably had no jurisdiction.

The DOL Fiduciary Rule was one of the first attempts to require financial advisors who received commission-based compensation and the firms that employed them to put their clients first in the eyes of the law. It was intended to help bridge the gap between the appearance of being a fiduciary and actually having to act as one. 

Just because it may have been welcomed by some in the investment advice industry and many in the general public does not mean it was a popular rule, however. Investment companies saw it as a compliance nightmare and a threat to their revenues, particularly in commission-based products. Additionally, it would have granted much greater regulatory power to the Department of Labor over financial advisors and related investment and financial advice-giving companies. There was considerable pushback as a result, and once the Trump administration became involved, the rule was in peril. The implementation was delayed multiple times and, ultimately, killed off in 2018 by the Fifth Circuit Court of Appeals.

Regulation Best Interest, Form CRS, Standard of Conduct for Investment Advisers 

After the ultimate failure of the DOL Fiduciary Rule, the SEC began their attempt to modernize regulations and disclosures in regards to broker-dealers, as well as registered investment advisors. In 2019, the SEC adopted a package of rulemaking and interpretations called SEC Regulation Best Interest, or “Reg BI”, that allowed advisors and firms to enter into “Best Interest” contracts that disclosed the conflict of interest that existed if they received any other types of compensation other than the types allowed under the fiduciary rule. 

According to the SEC, “Under Regulation Best Interest, broker-dealers will be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. Regulation Best Interest will enhance the broker-dealer standard of conduct beyond existing suitability obligations and make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer when making recommendations.”

Additionally, Form CRS became a required document for both registered investment advisors and broker-dealers. This document was designed to offer a plain English view of the services offered by the investment professional, how compensation and fees work, and any disciplinary history the financial professional has faced. To view an example of this, here is the Form CRS for our firm. 

The SEC also issued their interpretation of the standards of conduct for investment advisers (which, incidentally, is a really well-written document). The goal of this appeared to be a restatement of what is expected of investment advisers – a duty of care and a duty of loyalty. They reaffirmed that an investment adviser is a fiduciary and must act in the client’s best interest at all times. A contrast was made between broker-dealers and investment advisers in that their compensation models may be different, namely the ability to accept commissions in a broker-dealer environment, which causes a separate and distinct difference in the conflicts of interest present and the necessary disclosure.

Regulation Best Interest and Form CRS were implemented with a compliance date of 6/30/2020. The standards of conduct were effective on 7/12/2019.

Code of Ethics and Standards – The Fiduciary Update by the CFP® Board

Seeing a regulatory hole between the Investment Advisers Act of 1940 and a fiduciary standard, the CFP Board has established a set of fiduciary guidelines and rules that govern CFP® professionals. The last major update of these standards was in 2007. Around the same time of developing Reg BI, The Certified Financial Planner Board of Standards developed the Code of Ethics and Standards of Conduct. This went into effect in October of 2019 with enforcement beginning on June 30, 2020

According to the CFP Board, “This is a significant strengthening of the prior standard, which required a CFP® professional to act as a fiduciary only when providing financial planning. The fiduciary obligation includes a duty of loyalty, a duty of care, and a duty to follow client instructions. Other important changes in the Code and Standards include more detailed requirements for fully disclosing material conflicts of interest, obtaining informed consent, and managing those conflicts.” 

The most important part of this update to the rule is the expansion of fiduciary duty to act in the best interests for clients in all situations, not just during the financial planning process. For advisors that hold a CFP® designation, those that are employed at broker-dealers and insurance companies may find new challenges in meeting this fiduciary standard, particularly if they continue to sell commission-based products. 

DOL Fiduciary Rule – Take Two is On The Way

In 2018, the Department of Labor Fiduciary rule was ordered to be sent back to the drawing board to review the viability and come up with any revisions. In January of this year, the DOL sent the revised rules to the OMB (Office of Management and Budget) and in June they were announced. In a shocking move, it was recommended that an exemption that offers “a new prohibited transaction class exemption for investment advice fiduciaries.” This would allow financial advisors and fiduciaries potentially to receive compensation such as commissions, 12b-1 fees, mark-up and mark-down compensation, sales loads, and revenue sharing compensation. This would impact both ERISA accounts (example: 401k plans) and IRAs.

Under the goal of maintaining regulatory efficiency, transactions that are compliant under Regulation BI would be deemed as meeting with DOL Fiduciary Rule standard. A loophole seems to exist in the rule for insurance professionals, which sell annuities inside of retirement plans for a commission. According to the initial proposal, it appears a fiduciary relationship does not exist in a one-time transaction with no expectation of ongoing review as well as no requirements to comply with Regulation BI if one is not a Registered Representative.

As before with the original DOL Fiduciary Rule, this has come under some criticism. In an article from Thinkadvisor, “Barbara Roper, director of investor protection for the Consumer Federation of America, said the rule ‘reopens loopholes in the definition of fiduciary investment advice, making the standard easy to evade. It creates a new exemption to allow advisers to get conflicted compensation, subject only to Reg BI’s weak, non-fiduciary standard.’”

What Does This Rulemaking and Regulation Actually Seek to Accomplish?

First off – are you completely confused yet? If the answer is “yes”, you are not alone. The original DOL Fiduciary Rule by the Obama Administration was definitely a nod towards bringing more investment professionals under a more uniform fiduciary standard. As it failed and Reg BI was implemented, a more “fiduciary lite” version was put into its place. This is likely to follow when the rules are finalized for the new version of the DOL rule. 

Where this goes from here will likely depend on what happens after the presidential election, and where the regulatory winds are focused. There is a chance that this nod to increased focus on conflicts of interest and disclosure will eventually lead to a uniform fiduciary standard at some point for all financial “advisors” — meaning insurance, broker-dealer, and investment advisers. The other possibility is that we continue to see the bifurcation in fiduciary standards applied to these groups, as we have in the most recent series of rulemaking.

One thing is clear to us – the best way to insure that you are working with someone who is working in your best interest and acting as a fiduciary is to hire a financial advisor that works at a fee-only firm and does not accept commissions from the sale of investment products at any time. Additionally, working with a CFP® that follows strict standards of care may also be something that investors seek out when they are looking for a long-term relationship with a financial professional whose practice centers their financial well-being.

Clint Walkner

Jonathon Jordan, CFP®

 

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Preparedness

Preparedness

The idea of being prepared requires a unique mindset. It demands that we think about and plan for a situation that is much worse than our current one. Mentally and emotionally, it’s difficult to put ourselves in the middle of the hypothetical thunderstorm when it’s sunny outside. It’s easy to fall into a false sense of security that the bad times won’t be as bad or scary as they often are. This, then, leads to not actually preparing for those times, but more so going through the motions of a plan to make ourselves feel a little better. Proper preparedness requires careful thought, planning, and a realization that when, not if, things go sideways, we have already rehearsed the steps to avoid a bad outcome. 

As some of you may know from our podcast, I recently had a pretty serious health scare that landed me in UW Hospital twice for three-day admissions. Fortunately, the incredible doctors, nurses and staff have me back on the mend and feeling much better. But I can’t seem to shake the feeling of laying in that hospital bed and wondering what I could have done differently to be more prepared. My case was one with little notice and didn’t afford me any warning. That said, there were still things that I could have done to improve the outcome. 

I will admit that I somewhat took my health for granted, having lived the last twenty years of my life without a medical issue of any kind. Unfortunately, this led me to my false sense of security and failure to be proactive. Why do I need a physical, I feel great? Why do I need a primary physician, I never get sick? It was this kind of thinking that led to a lack of planning and foresight as to what could happen. My situation would have been helped greatly with a few proactive steps, such as the annual baseline of health that having a yearly physical provides, and a solid relationship with a general practitioner. 

And the idea of being prepared isn’t limited to our health and wellbeing. We should absolutely apply these lessons to our financial lives. Financial advisors preach about the importance of having an emergency fund and liquid assets for unforeseen expenses, and rightly so. This year has illustrated just how quickly things can go awry. Stable employment was no longer stable with the unemployment rate reaching into the double digits. The first half of 2020 was the litmus test for preparedness. We will get past the ugliness of COVID and the economy will recover, but we should think critically about how we handled this situation and what we may do differently the next time it happens.  

When you consider your own preparedness, I would recommend focusing on these four areas of your financial situation. Liquid assets or an emergency fund is the first area. Ideally, we would like to see at least three months of expenses built up in bank accounts or safer investments. This will help to bridge the gap of a sudden layoff or gap in employment. A mid-term investment account is the second area of focus. This is an account that is typically using market related investments, however, the money can be withdrawn without penalty. This is the backup to your emergency fund. We generally use this money in the event that our emergency fund is depleted, but we are still not out of harm’s way. Insurance coverage is the third area. Do you have short-term and long-term disability coverages and, if so, how much do they actually cover? These are questions to ask prior to needing the coverage as the amount of the benefit may not replace your entire income. You may decide to buy additional coverage if your work benefit is lacking. The fourth area is comprehensive estate planning. In the event that you become unable to make decisions on your own, it is crucial that you have powers of attorney in place. If you do not have these documents as part of your estate plan, I would strongly recommend having your plan reviewed with an attorney. 

Ultimately, we need to live our lives and not be scared about what tomorrow will bring. It doesn’t make sense to constantly live in fear. With that being said, being prepared and mentally ready is the panacea for the unexpected. It gives us the confidence that the next big thing, whatever it may be, won’t catch us off guard. They say that an ounce of prevention is worth a pound of cure, and I now have a much better understanding of that phrase. Be conscious of what might happen, think through the different scenarios and make changes to your current situation to be a little more prepared. Trust me, you will be happy that you did. 

 

Nate Condon

Financial Planning for Special Needs Families

Financial Planning for Special Needs Families

There can be many challenges for families with medically complex or special needs children: emotional, physical, and financial. Some considerations include increased medical and care costs, an inability to qualify for certain types of insurance or social programs, and planning for their life as an adult if they are unable to financially support themselves or live independently. This blog is a follow up from a Gimme Some Truth podcast request and looks to touch on some of the aforementioned topics.

Raising children is expensive; the USDA estimates that middle-class, married couple families can expect to pay close to $240,000 per child by the time the child becomes an adult (that number is excluding college!). It may be more expensive to raise a special needs child. Autism Speaks estimates a lifetime cost for a person with autism, for example, can be $1.4 – $2.4 million.

About half of US children with special health care needs are covered by private insurance while another half are covered by Medicaid (with 4% uninsured). In many cases, Medicaid covers medical and long-term services that private insurance does not. There are a number of families that find themselves unable to qualify for Medicaid while their private insurance may not provide the coverage that they need for their special needs child. There are programs such as the Katie Beckett Program that helps these types of families “fill the gap”. The Katie Beckett Program allows families that have too much assets or income to qualify for Medicaid still have access to Medicaid programs while their child still lives at home, even if they have private insurance.

If a special needs child has an inability to work or live independently, there will have to be a plan in place for the care and financial wellbeing of the child. Establishing a plan for guardianship (if the parents were to die) of children is highly recommended whether there is a special needs child involved or not. However, additional care and planning for someone with special needs can go beyond childhood and last their entire lifetime.

There are a number of strategies on how to protect someone with special needs financially. One way to support someone with special needs financially without putting them at risk of not qualifying for programs such as Medicaid is a special needs trust. The trust is set up to benefit the person with special needs; the funds in the trust can be used to pay for their needs such as medical, equipment, rehabilitation services, and much more. Special needs trusts can be funded from gifts by the family or even from life insurance proceeds. One thing to note is that the trust should be administered in a way that the trust pays the service providers directly, not the beneficiary (otherwise the beneficiary may be at risk of losing public assistance). Engaging with an estate attorney with experience in special needs and disability planning is a good place to start. One resource is Wispact, which has compiled a list of attorneys that have a focus in this area. 

Each family is unique; some concepts mentioned may apply to their needs, but they might not. This blog post is meant to cover a high-level, informational overview of special needs planning and to include links to some resources that were mentioned in the podcast. If you or someone you know would like to have a more in-depth discussion around their specific scenario, please reach out. We welcome the conversation.

 

Mitch

The Slow Pace of Fast Change in a Post-COVID World

The Slow Pace of Fast Change in a Post-COVID World

One of my favorite (perhaps apochryphal) quotes comes from the French novelist Gustav Flaubert who, while surveying Paris during the Franco-Prussian War of 1871 declared, “After all of this, we will still be stupid.” And while Flaubert’s view of human nature is perhaps slightly more negative than mine, I do think that one of the things at which we excel as a species is overstating the long term effects of recent or current events.  

That quote came to mind when I saw this morning’s headline from the Wall Street Journal: “Europe Lease Deals Suggest Traditional Office Will Endure in Post-Covid World.” The assumption at work in this headline is that a universally accepted truth in a post-COVID world has been that real estate rentals were going to take a hit, as businesses would all shift to work from home via Zoom and the various other productivity apps that link us. However, as this article suggests, the shift away from traditional offices to full-time remote working will likely not happen overnight.  

We have seen a sharp decline in travel in this pandemic, since even in the best circumstances, airplanes tend to be petri dishes of disease. However, this is not the first time that the industry has faced an existential crisis. Recall the predictions about the industry’s demise during the climate of fear immediately after 9/11. Students of history will remember that not two months later, a plane crashed outside of New York City, and, in December of 2001, the infamous shoe bomber was also arrested, compounding the fear of flying that was already in the atmosphere. Similarly, in an article in the Financial Times, airline experts believe that the industry will change– more point-to-point flights, perhaps fewer giant planes– but that ultimately, according to former head of British Airways Sir Rod Eddington, “if we get a vaccine, people will be back to normal in a year.”

None of this is to say change won’t happen– perhaps men will start washing their hands after going to the bathroom more— but the changes will be more subtle and less dramatic than we think. And, like taking our shoes off when we board airplanes, they will likely soon become the new normal.  

Perhaps the greatest confirmation of the fact that the ways of the world will be slow to change is that I, who passionately embraced working from home (almost as much as my dog), am writing this to you from our office on the corner of Glenway and Monroe.    

 

Keith Poniewaz