It's time to prepare for the nanny tax.

There are new form 1040 reporting rules for the domestic employment tax, popularly known as the nanny tax, for 1995 tax returns. Because CPAs are responsible for signing--under penalties of perjury--form 1040 income tax returns with domestic employee information, it is important they take the time to ask their clients if they employ domestic employees. Here are some points CPAs should review:

* Ask if the client has paid any domestic employee $1,000 or more during 1995. The Internal Revenue Service defines domestic service as being of a household nature performed in or around a private home, including a tent, boat, trailer or hospital or hotel room. It includes services that help maintain the employer's residence as well as serving the employer or other household members. Affected employees might include housekeepers, maids, nursemaids, babysitters, cooks, chauffeurs, companions, yard workers and live-in helpers.

* Notify clients who paid $1,000 or more in 1995 that employment taxes for the domestic employee will be recorded on form 1040, schedule H, this year.

* Suggest that income tax withholdings be increased or additional estimated tax payments be made to avoid a large balance due in April. (There is no estimated tax payment penalty for the nanny tax until 1998.

* Confirm that the client has made adequate state employment tax filings and payments for 1995.

* Ask if the client paid less than $1,000 for 1994 but more than $50 per quarter to a domestic employee and withheld and paid Federal Insurance Contributions Act taxes for that employee. If so, suggest that a refund claim and form 843 be filed.

* Review the employee's tax status. For example, the worker may be an independent contractor rather than an employee, so the filing requirements may not apply.

Know the forms

CPAs should review other federal and state filing requirements relevant to hiring a household employee, including

* Form I-9- "Immigration Law Requirements." This form is used to prove an employee's identity and eligibility to work.

* Form SS-4, which is used to apply for an employer identification number. If the employee has no Social Security number, the employee should apply for one with the Social Security Administration.

* Income tax withholding on form W-4. Domestic employers do not have to withhold income taxes for household employees, but if the employee requests, the employer may voluntarily do so by having the employee fill out a form W-4.

* Form W-5--"Earned Income Credit Advance Payment Certificate." This form is used by employers to make advance income credit payments to eligible employees.

* Form W-2, which must be furnished to any employee who received more than $600 in wages, even though domestic employers may not have to pay and withhold FICA tax for wages less than $1,000.

* State tax forms, which may be needed to pay state unemployment taxes, state workers' compensation or disability insurance and to withhold state income taxes.

Remember the deadlines

CPAs should keep the following filing deadlines in mind:

* January 31. Give a copy of the W-2 to the employee.

* February 28. Submit a copy of the W-2 to the IRS (with Form W-3, "Transmittal of Wage and Tax Statement," if there is more than one employee).

* April 15. Because the nanny tax is computed on schedule H--which is filed with form 1040-it is due on this date.

* April 15, June 15, September 15 and January 15. Estimated payments on form 1.040ES are due.

--Eileen Sherr, technical manager, American Institute of CPAs tax division