After several interviews you finally find the perfect nanny. She gets along well with your children, has a flexible schedule that’s a match for your hectic one, and her references are glowing.
One catch – when you discuss salary, she asks to be paid “under the table.”
Here are a few reasons why you might be tempted to comply with her request and pay her “under the table”:
There would be no need to pay the ‘Nanny Tax’, allowing you to offer a higher salary.
Your sought-after nanny may have received a similar offer from someone else who will be deducting taxes. By going the “under the table” route, she would receive a larger net check each pay period than she would receive by accepting the other offer. This would make your offer appear more enticing. Of course, the reality is that your nanny legally still owes income taxes on that money whether you withhold taxes or not.
Navigating the employment tax laws appears complicated and time-consuming.
Paying “above the table” and complying with the law can appear daunting, so figuring out what forms are needed for an employee seems like a big task that you may not feel like taking on. The reality, however, is that paying nanny taxes is not as complicated as it might first appear, and there is plenty of help and assistance available to get you started.
Tracking a nanny’s wages is time consuming.
After keeping up with all the things that are going on at work, at home, and with the children, the last thing you may want to do is stay on top of somebody else’s hours and wages.
The bad news: Avoiding the “Nanny Tax” By Paying “Under the Table” is illegal
Not withholding and paying taxes on your nanny’s wages is not only illegal, but puts your family at financial risk. In the event of an audit, as the employer, you would be responsible for all the “Nanny Taxes” (i.e. social security, Medicare and other employment taxes) that are owed to the government on the nanny’s wages, not to mention additional interest, fines and penalties. The risk of audit is higher than you might think, and there is also a chance that your nanny may end up “spilling the beans” about your arrangement as well. Although at the start you may think you have a good relationship with your nanny and that your employee will never “turn you in”, realize that this employment relationship will eventually end, and perhaps not on good terms. Even if you and your nanny do part ways on good terms down the road, many times the first place a recently unemployed nanny will turn is to the unemployment office, to file for benefits, at which point your “under the table” arrangement is likely to be exposed.
What exactly is the “Nanny Tax?”
As of 2019, if you pay $2,100 or more in cash wages to a household employee, you must also withhold and pay Medicare and Social Security taxes for this employee (FICA), as well as federal unemployment taxes (FUTA). The combination of these federal taxes is commonly known as the ‘Nanny Tax’. State tax requirements vary but generally you will probably need to pay or withhold state income or employment taxes as well.
The good news: There are Options To Pay Legally
1: You can hire a household payroll service to take care of the taxes for you. Household payroll services do keep you legal, but they are expensive and can add a $1,500 or more to your household budget the first year alone. Although a payroll service will relieve you of most payroll tasks, you will still need to give the payroll service your nanny’s weekly wage and other information. While a household payroll service may be the answer for some families, most find this a very expensive option.
2: You can handle paying your nanny taxes yourself, stay legal, and save money by letting NannyPay payroll software help you for just $149.95 a year (for up to 3 employees). This will save you both time and money. NannyPay is a DIY payroll software that makes it easy to track the wages you pay to your nanny or other domestic employees. NannyPay calculates the appropriate withholding taxes, and will even generate year-end IRS Forms W2/W3 and a Schedule H, the forms most household employees must file to report and pay their federal employment taxes each year.
You both will benefit by paying “above the table”
1: You won’t need to worry about putting your family in jeopardy in the case of an audit or exposure.
2: Paying your nanny legally treats her like the professional she is, and fosters her future financial security.
3: By paying “above the table”, you are providing your nanny with a verifiable wage history which helps her apply for a car loan, mortgage and build a solid credit history.
4: Paying legally also ensures your nanny will be eligible to apply for state unemployment benefits, as well as workers’ compensation and disability protection in many states.
Not only is paying the “Nanny Tax” the legal way to go, it’s the most beneficial to both parties in the long run.