Legal Nanny Payroll – It’s Worth It!

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

Unemployment Claims:

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 those paying employees “on the books” can purchase this important coverage.

Tax Fraud?

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, you may find yourself in a legal and financial mess.

Why Your Nanny Wants to be Paid Legally

Your nanny benefits from both unemployment insurance and workers’ compensation coverage. In addition to these important worker protections, your nanny has other compelling reasons to want her payroll on the books.

Access to Medical Insurance under the Affordable Care Act

Employees (those with legal payroll) whose employers do not offer group plans – this is the majority of nanny employment – may obtain legally mandated individual health insurance through the online marketplaces. Low and middle-income employees may qualify for ACA tax credits that will ensure that good coverage is also affordable coverage. As an employer you may also offer to reimburse some or all of her individual insurance premium in a tax free manner through an Health Reimbursement Account (HRA).

Social Security & Medicare Benefits:

Eventually she will retire and need retirement income. If you did not pay into the system she will not qualify for future benefits.

Tax Credits:

Low and middle-income employees can have access to refundable tax credits and these sometimes exceed her total income taxes! More than 20 states, the District of Columbia, and various City/County governments offer tax credits to low income wage earners.

Verifiable Income:

Whether she wants to buy a home, rent an apartment, purchase a car, or just qualify for a cell phone plan, at some time or other, she will need to have verifiable income. Verifiable income means she can prove that she has a record of consistent income sufficient to meet her proposed financial obligations – either pay check stubs, direct deposit advices, bank statements witnessing the deposit of regular pay, and/or tax returns.

It’s the law!

Tax evasion is a crime. You will sleep better knowing this is being taken care of.