Implications of a nanny who doesn't pay taxes

[Louisep]

I've found a nanny I like and when interviewing her I asked how she handles taxes and what I would need to do in this regard. She said she prefers to be paid cash so she doesn't have to pay taxes.

Hm. We live in the US - would this be highly illegal? Isn't there a childcare tax credit I can claim on my taxes and would I still be able to if she doesn't file her taxes?

I understand her situation - she's a Latino immigrant (legal) who sends money back to her family in Mexico. But I (also an immigrant) don't want to get in trouble with the law!

Any thoughts or advice about nannies and taxes?

[LynnS6]

As the employer, you are liable for paying a portion of the taxes and filing the forms, even if she doesn't file her forms. It's more than income tax, it's social security and unemployment too. She's doing herself out of social security, if nothing else.

And yes, it's illegal. Remember all those people who couldn't be appointment to major posts because they didn't pay taxes for their nannies? No, you couldn't claim child care tax credit if you don't pay her legally.

http://www.irs.gov/faqs/faq/0,,id=199649,00.html
http://www.dummies.com/how-to/conten...childcare.html

[RaeEllen]

Originally Posted by Louisep

I've found a nanny I like and when interviewing her I asked how she handles taxes and what I would need to do in this regard. She said she prefers to be paid cash so she doesn't have to pay taxes.

Hm. We live in the US - would this be highly illegal? Isn't there a childcare tax credit I can claim on my taxes and would I still be able to if she doesn't file her taxes?

I understand her situation - she's a Latino immigrant (legal) who sends money back to her family in Mexico. But I (also an immigrant) don't want to get in trouble with the law!

Any thoughts or advice about nannies and taxes?

I'm biased by the fact that my husband is a government attorney, so we can't fool around with this issue. So yes, it's illegal not to pay the "nanny tax." For most people, however, the worst that will happen is owing a bunch of money if you happen to get caught. I know that as a government employee, the implications for us could be much worse.

If you are not familiar with being a household employer, it can be daunting at first. I'd suggest familiarizing yourself with your tax responsibilities, as well as basic employment law, before deciding what you want to do as far as legality, and present that to a nanny candidate. There's only one legal way to handle taxes. Asking a candidate her preferences, aside from her withholding, really only opens the door to under the table transactions.

As far as the legal way goes (and this is a quick summary), you need to register as a employer with both the IRS and your state government. You have to pay employment tax of (approxamately) 15% of your nanny's salary for Medicare and Social Security. Half of this is your responsibility (above your nannies salary) Half of this is generally deducted from your nanny's paycheck. If you do not deduct the nanny's half, it becomes your tax responsibility. You can, at the nanny's discretion, also deduct his or her income tax.

All of these taxes need to be paid to the government, either by quarterly payments, or by adjusting your own withholding at work. You will fill out a form with your own tax return which will report these payments to the IRS, as well as giving the nanny a W-2 for her own taxes.

In addition, you make payments to your state government for unemployment insurance (and to the Feds on your tax return)

It sounds daunting, I know, but once you set things up it isn't that bad.

[Louisep]

Thanks! I was totally ignorant to all of this. I will tell her we want her to pay taxes and if she won't, we'll find another. I've found a great company that helps you figure out the costs and she would only be paying $3.50 a week in taxes, so hopefully that will help persuade her and all the benefits she'll get from paying taxes like unemployment benefits and social security.

[dachshundqueen]

You can always pay your share of the taxes that you will owe on her, issue her a 1099 income earned statement and let her run with it from there. If she chooses not to pay the taxes, at least that way you are covered.

Liz

[Louisep]

Originally Posted by dachshundqueen

You can always pay your share of the taxes that you will owe on her, issue her a 1099 income earned statement and let her run with it from there. If she chooses not to pay the taxes, at least that way you are covered.

Liz

Really? I was led to believe by this tax company that I have to withhold her taxes. Hm.

[MeepyCat]

Louise, the 1099 dodge is easier on you, but harder on your nanny, who has to then pay YOUR share of employer payroll tax. She can adjust her AGI to deduct part of it, but it's a pretty major cash hit to her.

It's possible to argue both sides of whether a nanny is an employee who should get a W-2 or an independent contractor who should get a 1099, but in my opinion, it's better to set someone who works for you full-time up on a W-2 and pay employer taxes. Otherwise you're in for a rough ride every April.

[dachshundqueen]

In the long run, I'd personally hire a nanny who I know is going to be honest. Someone who is dodging taxes isn't honest in my book and I have to wonder what else they're going to fudge. It also forces you to lie on your own taxes and I'm against that personally, which is why our business has no employees other than my spouse.

Liz

[physmom]

Thanks for asking this. I didn't know that stuff either... just a quick question to all those more knowledgeable about taxes. Is there a minimum hours one needs to hire a nanny for this to be applicable? We have a babysitter that just comes in a few hours a week and just for a temporary period of time. Do we need to worry about this?

[RaeEllen]

Originally Posted by physmom

Thanks for asking this. I didn't know that stuff either... just a quick question to all those more knowledgeable about taxes. Is there a minimum hours one needs to hire a nanny for this to be applicable? We have a babysitter that just comes in a few hours a week and just for a temporary period of time. Do we need to worry about this?

It's the dollar figure paid. Last year, anyone who paid a household employee ( which a nanny or babysitter would be considered) over $1700 was required to withhold and issue a W-2. I'm not sure if this figure has gone up this year.

[physmom]

Originally Posted by RaeEllen

It's the dollar figure paid. Last year, anyone who paid a household employee ( which a nanny or babysitter would be considered) over $1700 was required to withhold and issue a W-2. I'm not sure if this figure has gone up this year.

Thanks! We're no where near that figure, I'm glad to hear that we don't have to worry about this!

[Altair]

Full time domestic workers are not allowed to be 1099 Independent Contractors.

Also, if you don't pay taxes and you end up letting go your nanny, she can file for unemployment (even though you never paid into it) and you'll owe a whoooooole lot of back money.

http://parkslopeparents.com/index.ph...ice&Itemid=185

[ihugtrees]

Originally Posted by dachshundqueen

In the long run, I'd personally hire a nanny who I know is going to be honest. Someone who is dodging taxes isn't honest in my book and I have to wonder what else they're going to fudge. It also forces you to lie on your own taxes and I'm against that personally, which is why our business has no employees other than my spouse.

Liz

I have been a nanny for years, and I have only had one family out of the many I've worked for who wanted to pay taxes. None of my nanny friends paid taxes, either. Should I say we are all dishonest?

What about people who speed--you know, go 3 or 4 miles over the limit? They are endangering people's lives, including their owns...should I assume they have no respect for any laws and therefore are reckless, dangerous people?

Yes, I should have paid taxes. But the people I was working for could BARELY afford to pay me a living wage, let alone pay out extra. I, too, could not afford to have 20% taken out of my measly $10 an hour. And the truth is, maybe I should have found people with more money to work for, and maybe those parents should have put their kids in a daycare (which, if they had more than one kid, would've been more expensive than me.)

I really am not trying to be snarky at all, just point out that someone isn't automatically a 'bad' person or a 'bad' nanny because of one action.

[RaeEllen]

Originally Posted by ihugtrees

I really am not trying to be snarky at all, just point out that someone isn't automatically a 'bad' person or a 'bad' nanny because of one action.

I'm not the person you were quoting, and I'd never assume that. And, I recognize that it is very, very common to pay domestic workers "under the table."

However, I do think it's important not to minimize the illegality. Yes, speeding has some pretty bad "natural consequances." But, legally, the consequences usually aren't that bad. Paying a nanny under the table, for us, could lead to my husband losing security clearance and the loss of our job. Financially, it can lead to huge tax penalties.

[RaeEllen]

Originally Posted by RaeEllen

I'm not the person you were quoting, and I'd never assume that. And, I recognize that it is very, very common to pay domestic workers "under the table."

However, I do think it's important not to minimize the illegality. Yes, speeding has some pretty bad "natural consequances." But, legally, the consequences usually aren't that bad. Paying a nanny under the table, for us, could lead to my husband losing security clearance and the loss of our job. Financially, it can lead to huge tax penalties.

Whoops! Hit send too soon.

I was going to say, I think its important to get the possible ramifications of paying under the table out there. Because it is so common, some people may think that it's about as legally significant as speeding. Everyone needs to assess their own comfort level with it, possible consequances, and make their own decision.

[Shellie]

I'd venture to say that tax evasion and speeding are pretty different things. That's the former tax consultant in me talking though--I agree that it's very important not to allow misinformation to be spread. A lot of people just don't realize that this is a significant no-no.

I will admit that I think that how complicated it is to figure out contributes to domestic employers and employees not wanting to deal with it or being afraid they'll over-taxed.

My mom's last housekeeper was a legal immigrant who was audited by the IRS and found to owe years and years of taxes on housecleaning, nannying and even Avon-sales money. It was completely devastating financially (she'd just bought a house even!) and ruined her marriage. As far as I know she's still struggling to repay it. It wasn't pretty and she's told me she wishes she'd paid as she went along because it would have spaced it out *and* avoided penalties and the stress of getting caught.

[One_Girl]

I called the IRS helpline to ask about this issue as a nanny and I was told that it is the employers responsibility if I work in their home. I think you should set it up and not even make it an option. If she makes under a certain amount she will get the money back at tax time.

[dachshundqueen]

Originally Posted by One_Girl

I called the IRS helpline to ask about this issue as a nanny and I was told that it is the employers responsibility if I work in their home. I think you should set it up and not even make it an option. If she makes under a certain amount she will get the money back at tax time.

I second this.

Yes, I think you're dishonest by failing to pay taxes and report income. I get fined if I don't pay my estimated withholding tax. I don't have to report all our income, but we do. For us it is an ethical boundary we choose not to cross.

Unemployment insurance is another reason we have no employees. Back unemployment insurance premiums, ouch.

Liz

[MamaChicken]

We hired a nanny last January. I told her when I hired her that I was going to pay taxes. She was still surprised when I finished all the paperwork and she realized that she had to file her taxes for the first time ever. I didn't go the 1099 route, she was a domestic employee. I paid her $15,000 last year

FWIW, I paid the federal government approximately $1500 in SS and medicare taxes and got the $1600 child care deduction. I paid the state $300 for the unemployeement taxes. I feel safer this way, no way would I risk getting caught on an audit!

[aleatha5]

Kara -- there are a lot of mommas here, and people in general who don't think they can afford to pay taxes, or who can't afford to pay taxes. But they do. That's the reality of living in a country that provides a government and services for YOU. I think we would ALL rather not pay taxes, I certainly would rather not pay taxes. But that's not a legal or responsible choice to make.

I'd also rather not pay for my groceries, my clothing, my dinners at restaurants, and hey, some months, I can't afford to pay for those things, and so must forgo them. But the bottom line is, you do have to pay taxes. There are several jokes and colloquialisms about this because it's the truth of the matter -- death, taxes, etc.