Many families mistakenly believe that paying their nanny cash, off the books, is easiest all around. After all, no complicated tax forms, the nanny takes home more money, the family doesn’t pay taxes, it sounds good all around. Until it isn’t good at all!
The Family’s Risks
Nanny jobs are, by their nature, not permanent positions. The children will grow and move on to school. The family’s child care needs change dramatically from full time, to part time, to after school or before school only. The full time nanny typically will have to move on every few years. The short term unemployment benefits are a life saver to bridge the time, planned or unplanned, between jobs.
Did you know that your former nanny can apply for unemployment benefits even if she was paid cash? When forced to choose between paying the rent or buying groceries, many nannies will choose to do this out of desperation. When she files that claim, the family becomes legally liable for all employment taxes (15.3% of her wages) as well as penalties and interest.
Workers’ Compensation Claims:
Any nanny can suffer an on the job injury that will require medical care (and cost), and that can keep her out of work either temporarily or permanently. Your homeowner’s insurance generally does not cover injury claims for employees of the household – rather workers’ compensation insurance needs to be in place to cover these medical bills and losses. Only legal employers can purchase this important coverage.
The “nanny taxes” are part of the family’s personal income tax return. You sign your tax document under penalties of perjury. Failing to disclose your nanny’s wages and paying the employment taxes is tax fraud. While you may not go to jail for nanny tax fraud like Bernard Kerik did, you may find yourself in a legal and financial mess.