The rules were revised and, thanks to Baird and Wood, the taxes are now frequently referred to as the "nanny tax." Do you owe the nanny tax?

The nanny tax is employment taxes on wages of domestic workers such as gardeners, nurses, babysitters, nannies and housekeepers. If you paid such a worker more than $1,300 in 2002 ($1,400 in 2003), you may be required to pay Social Security and Medicare tax on the wages.

You owe the nanny tax if the household worker is your employee. The household worker is your employee if you control the work that is done and how it is done.

It doesn't matter whether or not the work is full- or part-time, or whether or not you hired the worker through an agency. If the household worker controls the work and how it is done, then the worker if not your employee but a self-employed independent contractor.

Self-employed household workers usually provide their own tools and equipment and offer their services to the public. These self- employed workers are responsible for paying their own taxes.

There are some important exceptions to the requirement to pay nanny taxes. If your household worker is your parent, spouse, child under age 21 or another person age 18 whose principal occupation is not household employment, then you do not have to pay the nanny tax. (Note that does not mean that these workers don't have to report the income.)

To simplify reporting these taxes, Schedule H for Household Employment Taxes, was added to your Form 1040.

While this simplifies filing and paying the tax, now taxpayers have a new dilemma. If they fail to pay the nanny tax, they are filing an incorrect and fraudulent income tax return. Getting caught could result in charges of perjury or even tax evasion, not to mention huge penalties and interest.

Adding Schedule H to the Form 1040 had an unexpected effect. Approximately 500,000 taxpayers paid the tax in 1994, but only about 290,000 paid such taxes in 1999.

Is this more non-compliance? Are we overrun with tax cheats?

Failing to report and pay required nanny taxes is tax fraud. If your employer increased profits by not paying payroll taxes on your salary, I'm sure you'd be among the first to condemn him.

Of course, your employer could save money by not paying payroll taxes or not reporting workers' wages so that they could pay lower salaries. It is no different with employers of household workers except that in this situation the law is broken far more often.

Sometimes employers of household help pay "under the table" so they can pay lower salaries to a worker who is evading income tax.

Not only is this against the law, but is also very detrimental to the employee. Being legal means your employment can be proven and shown on job applications, credit card applications, student loan applications.

Many things are critical to daily life. Is it a good thing for a worker to not be able to collect unemployment compensation, to be unable to prove his or her income when applying for a car loan or a mortgage? Will the worker need Social Security at some time in the future, when what should have been paid by you as the employer on his or her behalf becomes of crucial importance?

Neither the IRS nor state tax authorities are aggressive in pursuing nanny tax evaders. The issue usually comes up when complaints are brought by disgruntled workers, perhaps a worker who is presented with a 1099 form at the end of year, or maybe when a former worker applies for unemployment.

Admittedly, compliance is not easy. Not one of the 50 states has followed the federal lead to make reporting nanny taxes easier.

Even if you can just add your federal household employee taxes to your 1040, you can't do that for state taxes. This leaves the employer with a quarterly filing responsibility for the state.

Also, writing paychecks is a problem. When workers are paid hourly or by other varying amounts, each pay check requires the calculations of varying amounts of withholding, some by percentages, some by reference to tables or charts.

There are actually three separate federal employment taxes: 1) Social Security; 2) Medicare tax (together known as "FICA," Federal Insurance Contributions Act); and 3) federal unemployment insurance (FUTA).

You are not required to withhold federal income taxes from a household employee's wages, but may if the employee requests. You must withhold FICA from your household employee's wages, 7.65 percent, and you must remit the withheld amount plus a matching contribution (another 7.65 percent) to the IRS.

You also must pay FUTA taxes on the household employees wages. The FUTA rate is 0.8 percent.

Under the old, pre-Baird rules, employers had to file quarterly returns and pay taxes just like a business. Now Congress has tried to simplify matters and allow you the employer to file annually along with your 1040.

How to report and pay? File Schedule H for Household Employment Taxes with your 1040. You will need another tax identification number. You must apply for an Employer Identification Number (EIN) on a Form SS-4.

Even though you don't have to file employment taxes annually, the taxes are part of your regular income tax liability. Therefore, you may have to make quarterly estimated tax payments (or increase your estimated payments) to cover the new combined tax liability.

Check out Publication 15-A, Employer's Supplemental Tax Guide, available from the IRS and for more information get IRS Publication 926, Household Employer's Tax Guide. There are many companies who provide nanny tax services who will sell you software to help you do- it-yourself or provide payroll and tax services for you to relieve you of the burden.

Spencer, a Lancaster attorney, can be reached at 320 Race Ave., Lancaster, PA 17603 or by e-mail to Patti@spencerlawfirm.com. Her columns, which have appeared in Business Monday since October 1999, are published in a book.