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The Nanny Tax Nightmare: Risks in Paying Domestic Workers Under The Table

The Nanny Tax Nightmare: Risks in Paying Domestic Workers Under The Table

What’s on your list of “must-haves” for your dream job? A paycheck, perhaps?

Maybe that didn’t make your list, because getting a legitimate paycheck seems like a given. Companies are supposed to pay employees by the books; not under the table. Sure, some people hand their house cleaners cash at the end of each week — but they’re not companies, so that’s different, right? Actually, it’s not so different at all.

Hiring household help on an ongoing basis, in which the worker does not offer services to the general public, categorizes you as a household employer. That means your domestic workers are your employees — and they’re entitled to the same benefits as all non-exempt employees, such as being paid time and a half for overtime work. It also means you’re both required to pay Social Security, and Medicare taxes, if you pay your employees over $2,000 a year.

Many households get around these rules — sometimes unknowingly — by paying “under the table,” and not reporting the household payroll on their taxes. In the eyes of the law, this is tax evasion; and it comes with some serious consequences for both the worker and the household employer.

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How Common is Paying Under the Table?

Only about 250,000 households in the U.S. report household employee wages, even when workers like nannies providing childcare services  should be reported as a W-2 domestic employee.

According to the IRS, Schedule H filings have declined, even though the Bureau of Labor Statistics (BLS) reports that child care worker and home health aide positions are growing. Although there are many factors at play, tax evasion is likely a main cause of this discrepancy — less than 9% of surveyed domestic employees worked for an employer who paid into Social Security.

Overall, it’s estimated that up to 75% to 95% of people who employ domestic workers don’t pay employment taxes. That’s a lot of people who could find themselves in serious legal trouble — and the plea of “everyone’s doing it” won’t hold up in court.

What Are the Ramifications of Paying Under the Table?

Okay, so you pay your house cleaner or nanny in cash. You know that she’d rather get the cash up front, so she’s not going to report you — if no one finds out, it’s no problem, right? Well, not quite.

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Whether you get caught paying under the table or not, there are still more downsides than upsides to it. Your housekeeper or nanny won’t have access to things like workers’ compensation, disability benefits, unemployment insurance, Medicare, and Social Security — benefits offered by the government for long-term protection and income stability. This makes it quite difficult to plan for a future and retirement, with no access to Social Security. For domestic workers supporting families of their own, being paid under the table leaves them no way to keep their families financially stable if they become injured, or lose their job.

Your household workers will also lack access to certain loans and rental opportunities, because they have no official history of employment — something you may have taken for granted when you applied for your last car loan, or your apartment lease.

Paying the appropriate taxes comes with benefits for you, too. Household employers can qualify for certain tax breaks when they report their taxes accurately, which helps offset the cost of paying taxes in the first place. Many households can take advantage of the Child and Dependent Care tax credit, which is only available if you pay your nanny tax.

You can actually minimize the cost of your nanny tax, if your employer offers a Flexible Spending Account — a program that allows you to withhold pre-tax money from your paycheck, to pay for child care costs. This may end up offsetting your nanny tax costs completely. Ask your HR department if your employer offers an FSA as part of your benefits package.

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By paying your worker legally, both you and your employees can rest with peace of mind knowing you won’t be slapped with penalties if you’re audited. If you don’t pay proper taxes, you could end up with:

  • Tax evasion charges
  • Liability for both the employer and employee portions of FICA
  • Back taxes, with penalties and interest
  • Felony charges for tax evasion
  • Loss of a professional license

On average, you’ll pay around $25,000 in fines and penalties when you don’t pay employment taxes for your nanny, housekeeper, or other household worker. Aside from the financial penalty, getting caught for tax evasion has a wildly detrimental effect on your image — especially if your job involves being in the public eye — which can lead to a huge financial loss in your business, or even loss of your job. On top of that, doing the right thing for the people that care for those you love should be a priority. Take care of the people who care for you and yours.

How Can You Get Caught?

It may seem unlikely that you’ll get caught, but there are actually many situations that can expose your tax evasion — more than you might realize. Here are just a few examples:

  • If you misclassify your employees as independent contractors, and issue them a 1099 (opposed to a W-2), you can be charged with tax evasion.
  • If you don’t file your share of Social Security, Medicare, and unemployment taxes; but your employee files their own income taxes, there’s a good chance the IRS will look into it.
  • If you let your nanny go, and she later files for unemployment benefits, she must list her past employers — including your family. The unemployment office will investigate, and find that you didn’t file tax returns, or pay unemployment taxes. You’ll be audited, and your nanny will be declined benefits.
  • If your caregiver is injured at work and goes to the ER, your lack of workers compensation insurance will be exposed.

Note: There is no statute of limitations on failing to pay federal payroll taxes.

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How to Avoid Penalties

If you employ household workers, you need to follow specific a process to properly file your payroll taxes. Start with these steps:

  • Register with the IRS. You must register yourself as an employer to properly file taxes. To do this, apply for an Employee Identification Number (EIN). Then, you will need to report who is working for you, and where the work occurs.
  • Verify that your workers can legally work in the U.S. It’s against the law to hire a household worker who cannot legally work the U.S. It’s your responsibility to verify that the person you hire is a U.S. citizen, or a non-citizen who can legally work here. You must each fill out the Form I-9, and keep it in your records. This helps protect you, if your employee’s right to work ever comes under question.
  • Withhold and remit the employee’s taxes. Domestic workers can choose to have their taxes taken out of their paycheck before they receive it. As a household employer, you are not legally obligated to do so; but it’s encouraged, as it makes paying taxes easier.
  • Pay your portion of payroll taxes. Like any employer, you are responsible for your share of Social Security and Medicare taxes. You must withhold 7.65% from your employee’s paycheck, and you’ll also have to match that number with your own money.

If all of this seems overwhelming, there are many outsourced payroll solutions that exist to help you, for this very purpose. An outsourced company can handle the finances, taxes, and legal intricacies of household employment — so you can pay your employees and taxes confidently, without fear of penalty.

Featured photo credit: Shutterstock via shutterstock.com

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Kathleen Webb

Co-Founder, HomeWork Solutions

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Last Updated on March 13, 2019

How to Get out of a Rut: 12 Useful Ways to Get Unstuck

How to Get out of a Rut: 12 Useful Ways to Get Unstuck

Have you gotten into a rut before? Or are you in a rut right now?

You know you’re in a rut when you run out of ideas and inspiration. I personally see a rut as a productivity vacuum. It might very well be a reason why you aren’t getting results. Even as you spend more time on your work, you can’t seem to get anything constructive done. While I’m normally productive, I get into occasional ruts (especially when I’ve been working back-to-back without rest). During those times, I can spend an entire day in front of the computer and get nothing done. It can be quite frustrating.

Over time, I have tried and found several methods that are helpful to pull me out of a rut. If you experience ruts too, whether as a working professional, a writer, a blogger, a student or other work, you will find these useful. Here are 12 of my personal tips to get out of ruts:

1. Work on the small tasks.

When you are in a rut, tackle it by starting small. Clear away your smaller tasks which have been piling up. Reply to your emails, organize your documents, declutter your work space, and reply to private messages.

Whenever I finish doing that, I generate a positive momentum which I bring forward to my work.

2. Take a break from your work desk.

Get yourself away from your desk and go take a walk. Go to the washroom, walk around the office, go out and get a snack.

Your mind is too bogged down and needs some airing. Sometimes I get new ideas right after I walk away from my computer.

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3. Upgrade yourself

Take the down time to upgrade yourself. Go to a seminar. Read up on new materials (#7). Pick up a new language. Or any of the 42 ways here to improve yourself.

The modern computer uses different typefaces because Steve Jobs dropped in on a calligraphy class back in college. How’s that for inspiration?

4. Talk to a friend.

Talk to someone and get your mind off work for a while.

Talk about anything, from casual chatting to a deep conversation about something you really care about. You will be surprised at how the short encounter can be rejuvenating in its own way.

5. Forget about trying to be perfect.

If you are in a rut, the last thing you want to do is step on your own toes with perfectionist tendencies.

Just start small. Do what you can, at your own pace. Let yourself make mistakes.

Soon, a little trickle of inspiration will come. And then it’ll build up with more trickles. Before you know it, you have a whole stream of ideas.

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6. Paint a vision to work towards.

If you are continuously getting in a rut with your work, maybe there’s no vision inspiring you to move forward.

Think about why you are doing this, and what you are doing it for. What is the end vision in mind?

Make it as vivid as possible. Make sure it’s a vision that inspires you and use that to trigger you to action.

7. Read a book (or blog).

The things we read are like food to our brain. If you are out of ideas, it’s time to feed your brain with great materials.

Here’s a list of 40 books you can start off with. Stock your browser with only the feeds of high quality blogs, such as Lifehack.org, DumbLittleMan, Seth Godin’s Blog, Tim Ferris’ Blog, Zen Habits or The Personal Excellence Blog.

Check out the best selling books; those are generally packed with great wisdom.

8. Have a quick nap.

If you are at home, take a quick nap for about 20-30 minutes. This clears up your mind and gives you a quick boost. Nothing quite like starting off on a fresh start after catching up on sleep.

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9. Remember why you are doing this.

Sometimes we lose sight of why we do what we do, and after a while we become jaded. A quick refresher on why you even started on this project will help.

What were you thinking when you thought of doing this? Retrace your thoughts back to that moment. Recall why you are doing this. Then reconnect with your muse.

10. Find some competition.

Nothing quite like healthy competition to spur us forward. If you are out of ideas, then check up on what people are doing in your space.

Colleagues at work, competitors in the industry, competitors’ products and websites, networking conventions.. you get the drill.

11. Go exercise.

Since you are not making headway at work, might as well spend the time shaping yourself up.

Sometimes we work so much that we neglect our health and fitness. Go jog, swim, cycle, whichever exercise you prefer.

As you improve your physical health, your mental health will improve, too. The different facets of ourselves are all interlinked.

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Here’re 15 Tips to Restart the Exercise Habit (and How to Keep It).

12. Take a good break.

Ruts are usually signs that you have been working too long and too hard. It’s time to get a break.

Beyond the quick tips above, arrange for a 1-day or 2-days of break from your work. Don’t check your (work) emails or do anything work-related. Relax and do your favorite activities. You will return to your work recharged and ready to start.

Contrary to popular belief, the world will not end from taking a break from your work. In fact, you will be much more ready to make an impact after proper rest. My best ideas and inspiration always hit me whenever I’m away from my work.

Take a look at this to learn the importance of rest: The Importance of Scheduling Downtime

More Resources About Getting out of a Rut

Featured photo credit: Joshua Earle via unsplash.com

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