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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 January 3, 2020

The 10 Essential Habits of Positive People

The 10 Essential Habits of Positive People

Are you waiting for life events to turn out the way you want so that you can feel more positive about your life? Do you find yourself having pre-conditions to your sense of well-being, thinking that certain things must happen for you to be happier? Do you think there is no way that your life stresses can make you anything other than “stressed out” and that other people just don’t understand?  If your answer is “yes” to any of these questions, you might find yourself lingering in the land of negativity for too long!

The following are some tips to keep positive no matter what comes your way. This post will help you stop looking for what psychologists call “positivity” in all the wrong places!  Here are the ten essential habits of positive people.

1. Positive people don’t confuse quitting with letting go.

Instead of hanging on to ideas, beliefs, and even people that are no longer healthy for them, they trust their judgement to let go of negative forces in their lives.  Especially in terms of relationships, they subscribe to The Relationship Prayer which goes:

 I will grant myself the ability to trust the healthy people in my life … 

To set limits with, or let go of, the negative ones … 

And to have the wisdom to know the DIFFERENCE!

 2.  Positive people don’t just have a good day – they make a good day.

Waiting, hoping and wishing seldom have a place in the vocabulary of positive individuals. Rather, they use strong words that are pro-active and not reactive. Passivity leads to a lack of involvement, while positive people get very involved in constructing their lives. They work to make changes to feel better in tough times rather than wish their feelings away.

3. For the positive person, the past stays in the past.

Good and bad memories alike stay where they belong – in the past where they happened. They don’t spend much time pining for the good ol’ days because they are too busy making new memories now. The negative pulls from the past are used not for self-flagellation or unproductive regret, but rather productive regret where they use lessons learned as stepping stones towards a better future.

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4. Show me a positive person and I can show you a grateful person.

The most positive people are the most grateful people.  They do not focus on the potholes of their lives.  They focus on the pot of gold that awaits them every day, with new smells, sights, feelings and experiences.  They see life as a treasure chest full of wonder.

5. Rather than being stuck in their limitations, positive people are energized by their possibilities.

Optimistic people focus on what they can do, not what they can’t do.  They are not fooled to think that there is a perfect solution to every problem, and are confident that there are many solutions and possibilities.  They are not afraid to attempt new solutions to old problems, rather than spin their wheels expecting things to be different this time.  They refuse to be like Charlie Brown expecting that this time Lucy will not pull the football from him!

6. Positive people do not let their fears interfere with their lives!

Positive people have observed that those who are defined and pulled back by their fears never really truly live a full life. While proceeding with appropriate caution, they do not let fear keep them from trying new things. They realize that even failures are necessary steps for a successful life. They have confidence that they can get back up when they are knocked down by life events or their own mistakes, due to a strong belief in their personal resilience.

7. Positive people smile a lot!

When you feel positive on the inside it is like you are smiling from within, and these smiles are contagious. Furthermore, the more others are with positive people, the more they tend to smile too! They see the lightness in life, and have a sense of humor even when it is about themselves. Positive people have a high degree of self-respect, but refuse to take themselves too seriously!

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8. People who are positive are great communicators.

They realize that assertive, confident communication is the only way to connect with others in everyday life.  They avoid judgmental, angry interchanges, and do not let someone else’s blow up give them a reason to react in kind. Rather, they express themselves with tact and finesse.  They also refuse to be non-assertive and let people push them around. They refuse to own problems that belong to someone else.

9. Positive people realize that if you live long enough, there are times for great pain and sadness.

One of the most common misperceptions about positive people is that to be positive, you must always be happy. This can not be further from the truth. Anyone who has any depth at all is certainly not happy all the time.  Being sad, angry, disappointed are all essential emotions in life. How else would you ever develop empathy for others if you lived a life of denial and shallow emotions? Positive people do not run from the gamut of emotions, and accept that part of the healing process is to allow themselves to experience all types of feelings, not only the happy ones. A positive person always holds the hope that there is light at the end of the darkness.  

10. Positive person are empowered people – they refuse to blame others and are not victims in life.

Positive people seek the help and support of others who are supportive and safe.They limit interactions with those who are toxic in any manner, even if it comes to legal action and physical estrangement such as in the case of abuse. They have identified their own basic human rights, and they respect themselves too much to play the part of a victim. There is no place for holding grudges with a positive mindset. Forgiveness helps positive people become better, not bitter.

How about you?  How many habits of positive people do you personally find in yourself?  If you lack even a few of these 10 essential habits, you might find that the expected treasure at the end of the rainbow was not all that it was cracked up to be. How could it — if you keep on bringing a negative attitude around?

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I wish you well in keeping positive, because as we all know, there is certainly nothing positive about being negative!

Featured photo credit: Janaína Castelo Branco via flickr.com

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