My latest video is out and I wanted you to be one of the first to see it.
One of the questions I hear on a regular basis (especially from parents who are new to the child care world) is, “how do I pay my nanny legally?” or “when do I need to start paying my nanny or sitter over the table?”.
In this video, I cover:
- the difference between paying your care provider “under the table” versus “over the table”
- when you need to start paying your care provider “over the table”
- some of the benefits your family can receive when paying your nanny or sitter legally
- what can happen if you are caught paying your nanny illegally (hint: it’s not good!)
Scroll down and click on the video to check it out!
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A transcript of the video is below:
“Hey everyone, Laura here from Nanny Parent Connection.
Today I’m gonna talk to you about what can go wrong if you don’t pay your nanny legally.
So if you’re going to bring in some household help, you need to think about a plan and how you’re going to pay your nanny. There are two ways to pay your nanny. You can pay legally above the table or you can pay under the table, which is kind of more casual pay, how you would pay the neighbor kid to mow your lawn as an example.
So if you’re going to bring any sort of household to help in, such as a nanny, and that care is going to happen on an ongoing basis and you’re directing how that happened. The individual cannot be paid as a 1099 independent contractor. They have to be paid as a W2 employee. That means that they must be paid time and a half for any hours worked over 40 in a week and you must as a household employer pay for Social Security, Medicare, and any other employer taxes.
So how do you know when you need to start paying these taxes?
For 2021, the IRS has set the threshold for when you need to start paying those taxes at $2,300, so you can pay your care provider up to $2,300 each year before you’re responsible for paying employer taxes.
They do change that amount every year, so every year you do want to check and see how that threshold has changed, It has gone up, which it typically does, or if it has gone down.
The term paying under the table is a very common topic, but it’s important to know that it’s also synonymous with tax evasion. If you are going over that $2,300, as we all know, tax evasion has some really serious consequences for both the employer and the employee. It is estimated based on some recent studies that only about 250,000 households in the US are reporting household wages, and according to the IRS, Schedule H filings have declined, even though the Bureau of Labor Dtandards is reporting that home care and home aid workers are increasing, those kinds of workers are getting more popular.
A recent survey of domestic employees was completed that showed that fewer than 9% of them worked for employers who paid Social Security taxes. It also estimated that 75% to 95% of people who employ domestic workers such as nannies don’t pay payroll taxes, so they’re paying under the table, opening themselves up to a lot of liability if they ever get caught. So paying under the table, while there is a cost-saving if you’re not paying the payroll taxes which end up being about 10% of the nanny’s gross pay. It has some more down-sides than up-sides to it, so I’m going to talk about a few of those.
For the employees, not being paid legally means they won’t have access to Workers’ Compensation insurance. They won’t have access to any disability benefits and they won’t have unemployment insurance, Medicare, or Social Security. These benefits are really important later on in life. That means that that could impact their future, that would impact their retirement, it also can impact financial stability for their families. For example, if the worker is injured on the job, they could potentially be missing benefits that are not only going to offer protection for them but also potentially for their children or their spouses. Another thing that the worker is going to miss out on is that they’re going to lack access to certain loans and rental opportunities.
If they don’t officially have those pay stubs that one would get from being paid over the table or being paid legally, they’re not going to have that in payment history that they may need to provide proof of if you’re going to try to rent an apartment, or if you’re going to buy a car or getting it some other type of loan, or maybe even go to buy the first house. So that’s something really important to consider.
It’s important to know that even though the employer is responsible for some of these taxes. There are some tax benefits available at tax time for the employers. For example, child and independent care tax credits are available. Also, some employers might be able to get benefits such as flexible spending account through their own employer, through their work. It’s important to check in with your own human resources department, you might be able to access some of those pre-tax dollars and set some aside for child care expenses. You may wonder how in the world would I get caught paying my nanny or household employee under the table if I’m good with it and they are good with it! Because if I’m paying my provider in cash, they’re going to be making more money off the top right? So they’re happy. I am happy I’m saving money, so win-win right? Not so fast!
There are a few things you should think more about before you make this choice. If you don’t file your share of Social Security, Medicare, and unemployment taxes but the employee files their income taxes, that can flag the IRS.
If you let your nanny go, they can file for unemployment, In doing so, they’re required to give a list of all their former employers. The unemployment office can investigate and the nanny won’t get any benefits.
Here is an example of a situation that I just heard personally from a family where a nanny was at work and they got injured on the job and had to go tot he emergency room. But because the nanny wasn’t being paid legally by the family, they didn’t have access to Workers’ Compensation insurance. And unfortunately, this leaves both the nanny and the family in a tough spot because the nanny doesn’t have any access to benefits through Workers’ Compensation or Labor and Industries, and it could potentially open up the family to some legal liability there.
Alright, now we’re going to finish up with what can happen if the family gets caught not paying taxes.
So first off, I do want to put out this little disclaimer that I am not an attorney and this is not legal advice. First off, if you’re a nanny, you definitely would be responsible for any back taxes and probably some penalties and fines. So, what are some of the consequences if the family of not paying legally?
You could be responsible, you could hold all of the liability for both of your own portion as well as the employee’s portion of paying the back taxes.
You could be hit with penalties and fines for not paying those back taxes, and you could be responsible for interest charges that go along with that.
You could also be hit with criminal charges, which may include jail time for tax evasion.
Also, if you hold any professional licenses such as an attorney or a dentist, you could lose those.
It is important to know that there’s no statute of limitations on tax evasion, so 20 years after you employ that nanny you can still have the IRS come knocking on your door to collect those back taxes, and I don’t know what interest would be on a 20-year-old back taxes, but I’m assuming it would be a really large number!
So as you can see the pros of paying your nanny legally far outweigh the cons, nobody wants to land in jail over a nanny. It’s quick and easy to set up via payroll company or with a little bit of late work. If you have the time to invest in doing the payroll yourself.
If you would like to hire a nanny payroll service, we offer an amazing Nanny Payroll Service. Click here to learn more. Check them out, they’re fantastic and they work all across the United States so no matter where you’re at, they can help you get set up and be sure that you’re paying your nanny legally and you’re not going to be liable for any back taxes you’ll be paying above the table, you won’t have to worry about it one bit. All for only $75/month.
Alright, guys! That’s all we have for today on what can go wrong if you don’t pay your nanny legally. I hope you learned a few things today and I hope that I encouraged you to at least consider paying your nanny over the table. Enjoy your day!”