What could happen if I don't pay the nanny taxes? Are there any good reasons to pay?

compliments of 4NannyTaxes

In home care is expensive. After the family's mortgage payment, the nanny or home health aide salary is often the biggest expense in the household. Add the cost of taxes on top of this and many families wonder "Why?" If I don't pay the taxes the nanny keeps more money and it costs me less. The nanny makes little enough anyway - why should she have to pay tax?
Reporting nanny wages and paying Social Security taxes is the law. It is also the right thing to do for your nanny. Think about it. When you and your nanny agree to pay 'off the books' you are mutually agreeing to break the law. Is that the way you want your employment relationship with your nanny to start out? What message does that send her?

The Risks...

Both the nanny and the family face penalties if caught not paying the nanny taxes.
The family has both civil and possible criminal penalties. Once the family has filed an income tax return that failed to report nanny wages they run the criminal risk of tax fraud charges. It is rare that the IRS pursues the criminal case; they generally stop once the nanny taxes have been paid. The penalties and interest can easily double the tax due in just 4 - 5 years! If criminal penalties are pursued and the family is convicted, this is a felony offense. It will follow the parents for the rest of their lives. Sadly, in the case of domestics (housekeepers, companions, home health aides) engaged to provide assistance to an elderly person to help them stay in their home, there have been numerous cases of claims filed against the estate of the elder.
The nanny or domestic worker faces similar criminal and civil penalties. Failure to report your income to the IRS annually is a felony offense also. The family often 'gets honest' at some point, and the nanny finds a very unexpected W-2 form in the mail. She then must file or amend a previously filed tax return and pay the associated back income tax, penalties and interest.

More Information on Penalties and Interest

The Rewards...

The benefits to the nanny and the nanny's employer in paying the 'nanny taxes' generally fall into two categories.
Tangible Benefits:
• The nanny accrues credits for future Social Security and Medicare benefits.
• The nanny's income is verifiable, needed for loan and mortgage applications, utility applications, etc. Try establishing a cell phone account without verifiable income!
• The nanny can document residence and qualify for in-state college tuition rates. Many nannies relocate to a particular area because their long term goals involve attending a particular college. Obtaining resident status with verifiable income allows her substantial tuition cost breaks as well as qualification for financial assistance.
• The nanny qualifies for future unemployment benefits. Nannies often find they need these benefits to tide them over between jobs. A nanny's job will end - the children grow up and family needs change.
• Many nannies qualify for the Earned Income Tax Credit, a refundable tax credit available to certain low-income wage earners. This can be several hundred to several thousand extra dollars in the nanny's pocket every year.
• The family can qualify for child care tax breaks. These tax breaks can offset some or all of the additional employment taxes.

Risks Avoided:

• Household employment taxes are part of the family's personal Federal Income Tax return. Reporting the wages and paying the tax avoids the risk of failing an audit and the associated financial costs. Did you know that an attorney who is charged with failure to pay the nanny taxes (tax fraud) can be disbarred? A medical doctor can loose their license to practice?
• Compliant families will not be caught when the nanny files for unemployment benefits when the job ends. The is by far the most common way a family is caught - the unemployed nanny who needs to pay her rent or buy groceries is suddenly far less concerned about the possible future tax problems.
• Protection from Worker's Compensation claims. The family cannot obtain Worker's Compensation Insurance unless they have registered and obtained a Federal Employer Identification Number. The liability here to the family in the event of a work related injury is HUGE! A nanny who throws out her back handling your toddler can easily accumulate thousands of dollars in medical bills and lost wages. We don't think of the home as a dangerous workplace, yet we have encountered dozens of these situations over the years.
• There is no statue of limitations for employment taxes. A nanny may file for Social Security or Social Security Disability benefits many years later. When the employment history is not found, it is in the nanny's best interest at that time to report the families she worked for and qualify for benefits. The families will then have to reconstruct the employment history and pay BOTH the employer and employee portions of the non-paid Social Security and Medicare taxes, with substantial penalties and interest and fees to an accountant to figure the whole mess out. There is no statue of limitations for failure to pay the nanny (employment) taxes.

US Employment Tax Information for Nannies - The Nanny Taxes

Courtesy of Home/Work Solutions, Inc. The "Nanny Tax Experts"

Introduction …
US Nannies should try to be more aware of their legal rights and tax obligations than the average new employee of a business. Why? Because compared to the business employer, their family-employers will usually know far less about employer and employee obligations under the US Tax Code. And if your employers are foreign, perhaps working for an international company, then they will be even less familiar with how employment works in the US.

When you accept a job as a nanny, whether you found the job though a placement agency, an internet nanny service, or on your own, you are entitled to:
• A contract from your employer spelling out the terms and conditions of your employment
• An annual Wage and Tax statement, Form W-2.

You should remember, however, that being an employer might well be a new experience for the family you are working for. If you are well informed, you could even help your employers to understand and fulfill their legal obligations to both you and the Internal Revenue Service.

Employee or Independent Contractor?
With few exceptions (these being some doulas and some nannies in continuous temporary employment), if you work as a nanny you are an employee. It is your employer's [the family] responsibility to register with the Internal Revenue Service as an employer. They are responsible to deduct Social Security and Medicare tax contributions, on your behalf, from your gross wage, and pay these to the Internal Revenue Service, along with an additional employer's Social Security/Medicare contribution (which is part of their total cost but not part of your gross wage). Your employer is also required by law to provide you with an annual Wage and Tax Statement (Form W-2) by January 31 following the close of the year. The Form W-2 is a summary of your annual income and total tax deductions made by that employer. (Note: if you had multiple employers, you should receive a Form W-2 from each of them.)

If your employers tell you to take care of your own tax or ask you to be self-employed, you should refuse and insist that it is their responsibility. You can refer them to IRS Publication 926 for details. Nannies simply do not meet the Internal Revenue Service's criteria for self-employment. Having two or even three part-time jobs does not make any difference in this respect. Failure to insist on the employee-employer relationship will jeopardize your coverage under Worker's Compensation, Disability Insurance, and Unemployment Insurance programs. Nannies are in great demand - you should insist on a legal tax relationship or find another family that will meet their obligations!

Get It In Writing
Once your wages and conditions of work have been established and agreed to, make sure you receive a contract, or at the very least a letter of agreement, before you start work. This should clearly spell out (among other things) your agreed salary (specifying whether net or gross) and your employers' acceptance of their responsibility to withhold and remit Social Security and Medicare tax to the Internal Revenue Service on your behalf. It should also specify whether the family will be deducting your income taxes (Federal and State) or whether you will be responsible to pay these amounts directly to the appropriate taxing authority. Your employer, with few exceptions, is not liable for any of your personal income taxes. If an employer fails to meet their responsibilities, having your own copy of their agreement to do so, in writing, is your greatest protection. Most nanny agencies have a standard family/nanny work agreement that deals with hours, salary, and duties. There are also many variations available on the Internet.

CLICK HERE FOR MORE EMPLOYMENT FORMS

Net Pay or Gross?
You may have been quoted a net wage (i.e. the amount you will actually receive in your hand at the end of the pay period) by your nanny agency or employer. However, whether you have been quoted net or gross, it is important to understand that in reality you are always being paid a gross wage. It is advantageous to both you and your employer to agree to a gross wage (or at least to establish in your contract that your salary consists of a net wage plus employee Social Security and Medicare tax contributions and possibly income tax contributions). MANY MANY times you, the nanny, think the net payment you receive every week is after all of your tax obligations, including income taxes, while the family believes, rightly so, that they are only legally responsible for the Social Security/Medicare taxes. It is an unpleasant experience when you receive your W-2 in January to find that no income taxes have been paid in. A single nanny being paid net $400 per week would owe, at the end of the year, $1500 - $2500 in income taxes! Another important advantage of agreeing to a gross wage is that if tax rates are cut, as they have been several times in recent years, you automatically get the benefit, rather than getting the benefit (or not) at your employer's discretion.

What Happens if Your Employer Doesn't Pay the Taxes?
If you are not sure whether your employer is paying your Social Security and Medicare taxes, make some inquiries. Ask your employer for their Federal Employer Identification Number [FEIN] and a written statement of your quarterly earnings. The employer needs to report quarterly earnings to taxing authorities anyway, so this information should be readily available. Employers using a nanny tax service, HomeWork Solutions for example, can obtain quarterly earnings reports from the nanny tax service. If they don't have an FEIN they can't be paying your tax!

If you've just recently started working for them and they haven't employed before they may be in the process of setting up employer accounts. This will take 2-4 weeks, a little longer if the employers are not US citizens. Meanwhile, they will remain responsible for reporting all wages, even those paid before accounts were established, and remitting all taxes.

If you leave a job during the year, particularly if it was not on good terms, you should request, in writing, a wage and tax statement from the family. The family is legally obligated to provide separated employees with W-2 summary information, including the family's FEIN, within 30 days of a request. Bear in mind that the official form W-2 is often not available until late fall, so a written statement with all of the appropriate information will suffice. Make sure the family has your forwarding address so they can deliver the official W-2 statement in January.

Where to go for help?
There are many resources available to help the nanny understand her tax obligations. A good place to start is by calling the IRS forms office at 1-800-TAX FORM or visiting irs.gov and request a copy of Publication 926. On the web, information can be found at http://www.4nannytaxes.com/. If you worked with an agency, ask your agency representative for assistance, particularly if it involves the work agreement. Most importantly, communicate your concerns and questions with your employer. If you like your job and your employer is happy with your performance, open communication about pay matters can prevent a misunderstanding from turning into a major issue.

Information provided as a courtesy by Home/Work Solutions, Inc., The "Nanny Tax Experts." To request a free information about the "Nanny Taxes", call 1-800-NANITAX.

Monday Moxie: Minnesota Nanny Day by The Twin Cities Professional Nannies

The Twin Cities Professional Nannies (TCPN) is a nanny support group serving the Minneapolis and St. Paul metro area. Part of TCPN’s mission is to provide ongoing professional development for local nannies, families and community members. For the past eight years TCPN has put on an annual conference day in conjunction with the organization’s annual meeting. With this year’s theme – Come Play with Us – participants enjoyed the playful side of our careers.

Carrie Stolar presented Getting Kids Healthy and Back Outdoors. Carrie shared the most recent facts on children’s health and gave us ideas of fun things to do with kids outdoors! Ms. Stolar serves as Senior Brand Manager of the Säjai® Foundation. She graduated from Vanderbilt University, and earned her MBA at the Kellogg School of Management at Northwestern University. Carrie’s responsibilities at the Säjai Foundation include product development and brand management. She introduced us to a child friendly program that is being launched with children from six to twelve, and also gave us great hands-on practical ideas to get children – and ourselves – outdoors and active. We all took home a handout full of new and rejuvenating ideas to use immediately.

Paulette Pelletier presented Fun & Healthy Snacks. Paulette shared ideas and recipes to liven up snack time. We all shared our experiences with snack time challenges and the incorporation of all ages at snack. Paulette came to us with 20 years experience and has an Early Childhood background. She presents workshops for those working in the child care field and has been a Toddler Head Teacher and Child Care Center Director. Paulette currently is the Conference Coordinator and Field Representative for Providers Choice-sponsor of the Child and Adult Food Program. Not only did we have a chance to share our experiences of success or challenge with snacks and mealtime, but we also had the opportunity to explore other options that the children in our care could benefit from right away.

Paulette graciously agreed to fill our third speaker slot since she had become ill. Her vast experience working with child care providers made it easy for her to shift gears and bring us Homemade Games. This presentation fit into our theme like a glove. Paulette demonstrated easy to create games, crafts and activities for all ages. She generously shared her supplies and ideas allowing conference attendees to actively participate in a make-n-take session. Although a last minute addition to the conference schedule, Paulette’s Homemade Game session turned out to be a participant favorite.

TCPN Founder and current President, Mallette Parry had these sentiments to share:

On October 10th of 2009 TCPN had it 8th annual conference. I am happy to say I did a much better job leading this year than the very first one we had 2000. I know and I can speak for many when I say that we had a wonderful time this year. We used the theme "Come Play with Us". The speakers were centered on this theme. There were three speakers planned for the day. The first talked to us about the importance of outdoor play, the next one talked about Healthy Snacks and Homemade Games. Our second speaker stayed because our 3rd speaker became ill the morning of the conference. From what I heard she was a favorite to many. We had just over 20 nannies attend the conference. As a current board member I was very happy. We had several new nannies attend the conference for the first time. I look forward to seeing them at future events and the conference next year.

One of my favorite parts of the conference was the centerpieces. Shellie, our conference chair brought in children’s toys which included: a child's tea set and battleship. And I brought in a bead toy.

We had a wonderful conference committee. The board and the committee worked very hard to make it a huge success again this year. The day was very rewarding and I came away with the reminder of the value of being outside, great snack ideas and some wonderful homemade games. I also want to extend my thanks to all who donated for door prizes this year. A special thanks to Regarding Nannies for their donations. Over all, I have to say we were very pleased with the whole day.

Other attendees made these comments:

"I loved coming away with so many ideas"
"All of it was great!"
"A really good conference, they keep getting better."

TCPN is fortunate to have a group of nannies who care enough to volunteer their time and talents to bring an annual conference of this caliber to local nannies. Hours of work and planning went into it and another great conference was the reward.

Conference Sponsors are the final ingredient needed to make the annual conference a success year after year. We want to acknowledge the following individuals and businesses for their support: Nannies from the Heartland, Mary O’Connor, Regarding Nannies, HomeWork Solutions, Breedlove & Associates, Mallette Parry, Shellie Jensen, Lori Baker, Melissa Weinacht, Becky Kavanagh, Jean Toenges, Michelle LaRowe, and the International Nanny Association.

TCPN normally holds their Nanny Day the 2nd or 3rd weekend in October. Be on the lookout for the announcement of the 2010 date.

Weekend Round UP

Here's your weekend Round Up for this week of Regarding Nannies.

Have a Happy Halloween and we hope you find something here on Regarding Nannies that helps you this week!

Monday Moxie Greta Schraer shared her tips on how to organize a backpack for easy outings with kids. Greta has some great ideas so don't miss this one!

Tuesday Tips: Kathy Webb gave us some excellent tips on Crafting a Successful Nanny Share



Wednesdays Creative Nanny: Glenda shared some last minute ideas for spooky Halloween treats.



Thursday Table Talk: Myrna took us through the A-Z's of a what a professional nanny portfolio should contain. This is definitely one to keep!



Financial Friday Alice told us about the November Give Away (A great one so don't miss out) and showed us how to save money with the Stuck on You Sale!
Don't forget to enter and don't forget, you don't have to be a nanny to enter.

Coming up next week: A great article on the basics of cooking with kids by Becky Kavanagh

Week End Round Up

Just in case you missed something this week on Regarding Nannies:

Monday Moxie was a report from Nannypalooza 09 where professional nannies from all over the country met for a weekend of networking and education.

Tuesday Tips Deb Smith from Nannyclassifieds taught us how to spot a nanny scam online.

Wednesday Creative Nanny, Alice shared a fun craft with contact paper you can do year round.

Thursday Table Talk, Phyllis who works with Kathy Webb at Homework Solutions shared her journey in her battle with breast cancer.

Financial Friday Alice taught us how to do spreadsheets for our budget.

Next week on Regarding Nannies we will be sharing another great website for creativity with your kids, and we will also celebrate our 100th Post!