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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 February 15, 2019

Why Is Goal Setting Important to a Truly Fulfilling Life?

Why Is Goal Setting Important to a Truly Fulfilling Life?

In Personal Development-speak, we are always talking about goals, outcomes, success, desires and dreams. In other words, all the stuff we want to do, achieve and create in our world.

And while it’s important for us to know what we want to achieve (our goal), it’s also important for us to understand why we want to achieve it; the reason behind the goal or some would say, our real goal.

Why is goal setting important?

1. Your needs and desire will be fulfilled.

Sometimes when we explore our “why”, (why we want to achieve a certain thing) we realize that our “what” (our goal) might not actually deliver us the thing (feeling, emotion, internal state) we’re really seeking.

For example, the person who has a goal to lose weight in the belief that weight loss will bring them happiness, security, fulfillment, attention, popularity and the partner of their dreams. In this instance, their “what” is weight-loss and their “why” is happiness (etc.) and a partner.

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Six months later, they have lost the weight (achieved their goal) but as is often the case, they’re not happier, not more secure, not more confident, not more fulfilled and in keeping with their miserable state, they have failed to attract their dream partner.

After all, who wants to be with someone who’s miserable? They achieved their practical goal but still failed to have their needs met.

So they set a goal to lose another ten pounds. And then another. And maybe just ten more. With the destructive and erroneous belief that if they can get thin enough, they’ll find their own personal nirvana. And we all know how that story ends.

2. You’ll find out what truly motivates you

The important thing in the process of constructing our best life is not necessarily what goals we set (what we think we want) but what motivates us towards those goals (what we really want).

The sooner we begin to explore, identify and understand what motivates us towards certain achievements, acquisitions or outcomes (that is, we begin moving towards greater consciousness and self awareness), the sooner we will make better decisions for our life, set more intelligent (and dare I say, enlightened) goals and experience more fulfilment and less frustration.

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We all know people who have achieved what they set out to, only to end up in the same place or worse (emotionally, psychologically, sociologically) because what they were chasing wasn’t really what they were needing.

What we think we want will rarely provide us with what we actually need.

3. Your state of mind will be a lot healthier

We all set specific goals to achieve/acquire certain things (a job, a car, a partner, a better body, a bank balance, a title, a victory) because at some level, most of us believe (consciously or not) that the achievement of those goals will bring us what we really seek; joy, fulfilment, happiness, safety, peace, recognition, love, acceptance, respect, connection.

Of course, setting practical, material and financial goals is an intelligent thing to do considering the world we live in and how that world works.

But setting goals with an expectation that the achievement of certain things in our external, physical world will automatically create an internal state of peace, contentment, joy and total happiness is an unhealthy and unrealistic mindset to inhabit.

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What you truly want and need

Sometimes we need to look beyond the obvious (superficial) goals to discover and secure what we really want.

Sadly, we live in a collective mindset which teaches that the prettiest and the wealthiest are the most successful.

Some self-help frauds even teach this message. If you’re rich or pretty, you’re happy. If you’re both, you’re very happy. Pretty isn’t what we really want; it’s what we believe pretty will bring us. Same goes with money.

When we cut through the hype, the jargon and the self-help mumbo jumbo, we all have the same basic goals, desires and needs:

Joy, fulfilment, happiness, safety, peace, recognition, love, acceptance, respect, connection.

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Nobody needs a mansion or a sport’s car but we all need love.

Nobody needs massive pecs, six percent body-fat, a face lift or bigger breasts but we all need connection, acceptance and understanding.

Nobody needs to be famous but we all need peace, calm, balance and happiness.

The problem is, we live in a culture which teaches that one equals the other. If only we lived in a culture which taught that real success is far more about what’s happening in our internal environment, than our external one.

It’s a commonly-held belief that we’re all very different and we all have different goals — whether short term or long term goals. But in many ways we’re not, and we don’t; we all want essentially the same things.

Now all you have to do is see past the fraud and deception and find the right path.

Featured photo credit: Unsplash via unsplash.com

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