Advertising
Advertising

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.

Advertising

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.

Advertising

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.

Advertising

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.

Advertising

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

More by this author

Kathleen Webb

Co-Founder, HomeWork Solutions

nanny How to Increase Your Nanny’s Job Satisfaction nanny Understanding Your Nanny’s Annual Performance Review aging parent 5 Tips for Maintaining Work-Life Balance with Aging Parents Nanny The Nanny Tax Nightmare: Risks in Paying Domestic Workers Under The Table dad The Changing Definition of “Dad”

Trending in Lifestyle

1 10 Real Reasons Why Breaking Bad Habits Is So Difficult 2 10 Ways to Quickly Boost Your Workout Motivation 3 How to Get out of a Rut: 12 Useful Ways to Get Unstuck 4 8 Best Multivitamins For Men, Women And Kids 5 42 Practical Ways To Improve Yourself

Read Next

Advertising
Advertising
Advertising

Last Updated on November 9, 2020

10 Real Reasons Why Breaking Bad Habits Is So Difficult

10 Real Reasons Why Breaking Bad Habits Is So Difficult

Bad habits expose us to suffering that is entirely avoidable. Unfortunately, breaking bad habits is difficult because they are 100% dependent on our mental and emotional state.

Anything we do that can prove harmful to us is a bad habit – drinking, drugs, smoking, procrastination, poor communication are all examples of bad habits. These habits have negative effects on our physical, mental, and emotional health.

Humans are hardwired to respond to stimuli and to expect a consequence of any action. This is how habits are acquired: the brain expects to be rewarded a certain way under certain circumstances. How you initially responded to certain stimuli is how your brain will always remind you to behave when the same stimuli are experienced.

If you visited the bar close to your office with colleagues every Friday, your brain will learn to send you a signal to stop there even when you are alone and eventually not just on Fridays. It will expect the reward of a drink after work every day, which can potentially lead to a drinking problem.

Kicking negative behavior patterns and steering clear of them requires a lot of willpower, and there are many reasons why breaking bad habits is so difficult.

1. Lack of Awareness or Acceptance

Breaking a bad habit is not possible if the person who has it is not aware that it is a bad one.

Many people will not realize that their communication skills are poor or that their procrastination is affecting them negatively, or even that the drink they had as a nightcap has now increased to three.

Awareness brings acceptance. Unless a person realizes on their own that a habit is bad, or someone manages to convince them of the same, there is very little chance of the habit being kicked.

2. No Motivation

Going through a divorce, not being able to cope with academic pressure, and falling into debt are instances that can bring a profound sense of failure with them. A person going through these times can fall into a cycle of negative thinking where the world is against them and nothing they can do will ever help, so they stop trying altogether.

Advertising

This give-up attitude is a bad habit that just keeps coming around. Being in debt could make you feel like you are failing at maintaining your home, family, and life in general.

If you are looking to get out of a rut and feel motivated, take a look at this article: Why Is Internal Motivation So Powerful (And How to Find It)

3. Underlying Psychological Conditions

Psychological conditions such as depression and ADD can make it difficult to start breaking bad habits.

A depressed person may find it difficult to summon the energy to cook a healthy meal, resulting in food being ordered in or consumption of packaged foods. This could lead to a habit that adversely affects health and is difficult to overcome.

A person with ADD may start to clean their house but get distracted soon after, leaving the task incomplete, eventually leading to a state where it is acceptable to live in a house that is untidy and dirty.

The fear of missing out (FOMO) is very real to some people. Obsessively checking their social media and news sources, they may believe that not knowing of something as soon as it is published can be catastrophic to their social standing.

4. Bad Habits Make Us Feel Good

One of the reasons it is difficult to break habits is that a lot of them make us feel good.[1]

We’ve all been there – the craving for a tub of ice cream after a breakup or a casual drag on a joint, never to be repeated until we miss how good it made us feel. We succumb to the craving for the pleasure felt while indulging in it, cementing it as a habit even while we are aware it isn’t good for us.

Overeating is a very common bad habit. Just another pack of chips, a couple of candies, a large soda… none of these are necessary for survival. We want them because they give us comfort. They’re familiar, they taste good, and we don’t even notice when we progress from just one extra slice of pizza to four.

Advertising

You can read this article to learn more: We Do What We Know Is Bad for Us, Why?

5. Upward Comparisons

Comparisons are a bad habit that many of us have been exposed to since we were children. Parents might have compared us to siblings, teachers may have compared us to classmates, and bosses could compare us to past and present employees.

The people who have developed the bad habit of comparing themselves to others have been given incorrect yardsticks for measurement from the start.

These people will always find it difficult to break out of this bad habit because there will always be someone who has it better than they do: a better house, better car, better job, higher income and so on.

Research shows that in the age of social media, social comparisons are much easier and can ultimately harm self-esteem if scrolling becomes a bad habit[2].

6. No Alternative

This is a real and valid reason why breaking bad habits is difficult. These habits could fulfill a need that may not be met any other way.

Someone who has physical or psychological limitations, such as a disability or social anxiety, may find it hard to quit obsessive content consumption for better habits.

Alternately, a perfectly healthy person may be unable to quit smoking because alternates are just not working out.

Similarly, a person who bites their nails when anxious may be unable to relieve stress in any other socially accepted manner.

Advertising

7. Stress

As mentioned above, anything that stresses us out can lead to adopting and cementing an unhealthy habit.

When a person is stressed about something, it is easy for bad habits to form because the mental resources required to fight them are not available[3].

We often see a person who had previously managed to kick a bad habit fall back into the old ways because they felt their stress couldn’t be managed any other way.

If you need some help reducing stress, check out the following video for some healthy ways to get started:

8. Sense of Failure

People looking to kick bad habits may feel a strong sense of failure because it’s just that difficult.

Dropping a bad habit usually means changes in lifestyle that people may be unwilling to make, or these changes might not be easy to make in spite of the will to make them.

Overeaters need to empty their house of unhealthy food, resist the urge to order in, and not pick up their standard grocery items from the store. Those who drink too much need to avoid the bars or even people who drink often.

If such people slip even once with a glass of wine, or a smoke, or a bag of chips, they tend to be excessively harsh on themselves and feel like failures.

9. The Need to Be All-New

People who are looking to break bad habits feel they need to re-create themselves in order to break themselves of their bad habits, while the truth is the complete opposite.

Advertising

These people actually need to go back to who they were before they developed the bad habit and try to create good habits from there.

10. Force of Habit

Humans are creatures of habit, and having familiar, comforting outcomes for daily triggers helps us maintain a sense of balance in our lives.

Consider people who are used to lighting up a cigarette every time they talk on the phone or eating junk food when watching TV. They will always associate a phone call with a puff on the cigarette and screen time with eating.

These habits, though bad, are a source of comfort to them, as is meeting with those people they indulge in these bad habits with.

Final Thoughts

These are the main reasons why breaking bad habits is difficult, but the good news is that the task is not impossible. Breaking habits takes time, and you’ll need to put long-term goals in place to replace a bad habit with a good one.

There are many compassionate, positive and self-loving techniques to kick bad habits. The internet is rich in information regarding bad habits, their effects and how to overcome them, while professional help is always available for those who feel they need it.

More on Breaking Bad Habits

Featured photo credit: NORTHFOLK via unsplash.com

Reference

[1] After Skool: Why Do Bad Habits Feel SO GOOD?
[2] Psychology of Popular Media Culture: Social comparison, social media, and self-esteem.
[3] Stanford Medicine: Examining how stress affects good and bad habits

Read Next