Many household employees expect to negotiate a “net wage” or “net take home pay” agreement with their employer. The net take home pay agreement is an unfamiliar concept for many nanny employers, and often the new employer does not fully understand the financial implications of a net pay agreement with the employee.
A lack of clarity and transparency around a household employee’s compensation can jeopardize the entire relationship. HomeWork Solutions always advises hiring families and employees alike to put together a written work agreement. This is the place to document your financial agreement with your employer, including the respective tax obligations of both you and the family, as well as to articulate benefits, job responsibilities, and the all important confidentiality agreement. Most importantly, it should state the agreed GROSS hourly wage (before taxes are withheld) so both parties are in agreement up front. If pay is stated in a net wage (take home pay after taxes are withheld), the agreement can get confusing, as these terms are subject to interpretation which may differ between you and the family hiring you.
So what is a net take home pay wage agreement?
As a household employer, the family has certain tax obligations that they are legally required to comply with, and some they may choose to handle as an accommodation to you, their employee. Thus, a net wage agreement will always involve the employment taxes – Social Security and Medicare taxes, and may include the employee’s income taxes. Families may either agree to a take home pay net after the Social Security and Medicare taxes are withheld (and stipulate that the employee is responsible for his/her income taxes) OR may agree to a take home pay net after both the Social Security/Medicare taxes AND the employee’s Federal and State income taxes are withheld. All too often the family intends the former, and the employee assumes the latter. When this is not clearly understood, considerable strain can be placed on the relationship at tax time, when you assumed your income taxes were being withheld, and realize that instead you have a large tax bill because they were not withheld each pay period!
Video: Gross Pay v. Net Pay
Tip! Insist on an Itemized Pay Stub. It’s the law in 38 states! Don’t assume, take the time to understand your paycheck.
Your boss is the only one who can pay your Social Security and Medicare taxes to the IRS. if your boss fails to collect this tax from you via periodic payroll deductions, the boss is still responsible to pay the tax to the IRS. You, the household employee, CANNOT pay your share of Social Security and Medicare tax independent of the employer. A net wage agreement ALWAYS involves an agreement that the employer will be paying both the employee and employer portions of the Social Security/Medicare taxes. Each portion of the Social Security/Medicare taxes is 7.65% of gross wages, a total of 15.3%.
A net wage agreement ALWAYS involves an agreement that the employer will be paying both the employee and employer portions of the Social Security/Medicare taxes.
Your boss no legal obligation to withhold your income taxes. Most families with a full time employee (nanny or housekeeper for example) will agree to withhold the employee’s income taxes as an accommodation to the employee. After all, this is what all other employers do (whether they want to or not) in the commercial world. In a net take home pay agreement where the employer agrees that they will “gross up” the employee’s wage for tax reporting purposes to include the employee’s income taxes, this should be clearly understood by all parties, as this can end up with the employer paying as much as 50% more per hour by the time a gross wage is calculated. Get the pay calculations in writing – or better yet have your employer use a nanny payroll service like HomeWork Solutions who will issue pay stubs so you understand what amount of tax is included in your pay.
Need more answers? Contact HomeWork Solutions for help!