In home care is expensive. After the family’s mortgage payment, the nanny or home health aide salary is often the biggest expense in the household. Add the cost of taxes on top of this and many families wonder “Why?” If I don’t pay the taxes the nanny keeps more money and it costs me less. The nanny makes little enough anyway – why should she have to pay tax?
Reporting nanny wages and paying Social Security taxes is the law. It is also the right thing to do for your nanny. Think about it. When you and your nanny agree to pay ‘off the books’ you are mutually agreeing to break the law. Is that the way you want your employment relationship with your nanny to start out? What message does that send her?
Both the nanny and the family face penalties if caught not paying the nanny taxes.
The family has both civil and possible criminal penalties. Once the family has filed a personal income tax return that failed to report nanny wages they run the criminal risk of tax fraud charges. It is rare that the IRS pursues the criminal case; they generally stop once the nanny taxes have been paid. The penalties and interest can easily double the tax due in just 4 – 5 years! If criminal penalties are pursued and the family is convicted, this is a felony offense. Former NYC Police Commissioner Bernard Kerik was jailed for nanny tax fraud, among other felonies. A felony conviction will follow the parents for the rest of their lives. Sadly, in the case of domestics (housekeepers, companions, home care workers) engaged to provide assistance to an elderly person to help them stay in their home, there have been numerous cases of claims filed against the estate of the elder.
Workers’ Compensation Insurance - a policy of insurance that protects the familiy from the financial consequences of a workplace accident – can only be obtained by employers who are registered with the Internal Revenue Service. An uninsured workplace accident can ruin a family financially.
The nanny or domestic worker faces similar criminal and civil penalties. Failure to report your income to the IRS annually is a felony offense also. The family often ‘gets honest’ at some point, and the nanny finds a very unexpected W-2 form in the mail. She then must file or amend a previously filed tax return and pay the associated back income tax, penalties and interest.
The benefits to the nanny and the nanny’s employer in paying the ‘nanny taxes’ generally fall into two categories.
- The nanny accrues credits for future Social Security and Medicare benefits.
- The nanny’s income is verifiable, needed for loan and mortgage applications, utility applications, etc. Try establishing a cell phone account without verifiable income!
- The nanny can document residence and qualify for in-state college tuition rates. Many nannies relocate to a particular area because their long term goals involve attending a particular college. Obtaining resident status with verifiable income allows her substantial tuition cost breaks as well as qualification for financial assistance.
- The nanny qualifies for future unemployment benefits. Nannies often find they need these benefits to tide them over between jobs. A nanny’s job will end – the children grow up and family needs change.
- Many nannies qualify for the Earned Income Tax Credit, a refundable tax credit available to certain low-income wage earners. This can be several hundred to several thousand extra dollars in the nanny’s pocket every year.
- The family can qualify for child care tax breaks. These tax breaks can offset some or all of the additional employment taxes.
- Household employment taxes are part of the family’s personal Federal Income Tax return. Reporting the wages and paying the tax avoids the risk of failing an audit and the associated financial costs. Did you know that an attorney who is charged with failure to pay the nanny taxes (tax fraud) can be disbarred? A medical doctor can loose their license to practice?
- Compliant families will not be caught when the nanny files for unemployment benefits when the job ends. The is by far the most common way a family is caught – the unemployed nanny who needs to pay her rent or buy groceries is suddenly far less concerned about the possible future tax problems.
- Protection from Worker’s Compensation claims. The family cannot obtain Worker’s Compensation Insurance unless they have registered and obtained a Federal Employer Identification Number. The liability here to the family in the event of a work related injury is HUGE! A nanny or home care worker who throws out her back handling your toddler or assisting your elderly parent can easily accumulate thousands of dollars in medical bills and lost wages. We don’t think of the home as a dangerous workplace, yet we have encountered dozens of these situations over the years.
- There is no statue of limitations for employment taxes. A nanny may file for Social Security or Social Security Disability benefits many years later. When the employment history is not found, it is in the nanny’s best interest at that time to report the families she worked for and qualify for benefits. The families will then have to reconstruct the employment history and pay BOTH the employer and employee portions of the non-paid Social Security and Medicare taxes, with substantial penalties and interest and fees to an accountant to figure the whole mess out. There is no statue of limitations for failure to pay the nanny (employment) taxes.