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.

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

Tuesday Tip: Crafting a Successful Nanny Share

Tip for Crafting a Successful Nanny Share
by Kathy Webb


Many families team together to share the services of a single nanny. The nanny share concept arose out of the “Dot Com” crashes in the late 1990’s, and accelerated in 2008 with the multiple crises of rising gasoline prices, rising unemployment (especially in professional sectors such as banking and legal) and the Fall 2008 stock market declines. A nanny share is a wonderful way for the families to rein in their childcare expenses, and also for the nanny to maintain her income in troubled economic times. The biggest pitfalls of a nanny share are failure of the parties to adequately communicate terms/conditions in advance and failure of the parties to plan for the end of the share arrangement before it actually starts.

A three-way work agreement is a best practice when nanny cares for both families’ children simultaneously. While the nanny technically has two jobs, the arrangement has to be harmonious. The agreement insures that nanny and all parents are on the same page relative to the terms and conditions of employment. Additionally, sometimes the parents themselves find it useful to put their "agreement" on paper to include supplies, food, diet, baby equipment, and the like. A more traditional nanny work agreement is recommended when nanny works certain days for one family and the other days for a second family - this is not a traditional share.

Items to spell out in the three-way Family-Family-Nanny agreement include:

1. Compensation: Nanny's total compensation and how this total is calculated between each family. Discuss frequency and tax treatment - if deducting income taxes be careful to coordinate the deductions to consider the nanny's total income.
2. Payment to nanny for times when one or both families don't need the nanny on a scheduled day(s): Best practice is that nanny should be paid by all parties for all scheduled days that she is available to work.
3. Notice/severance agreement at end of arrangement by either family: If family A decides to leave the share, there should be either a notice or pay to the nanny in lieu of notice provision that allows nanny and family B to make arrangements to either find another family or end the share completely. This is the stickiest part of shares in my experience.
4. Coordination of paid time off: How will sick time be handled? Vacations? Will nanny have at least one week of vacation time at her choosing? What is the notice provision for vacation scheduling? When nanny is sick, how early do the parents require notice and who is notified?
5. Overtime compensation, especially when only requested by one party: For example, a nanny may earn $18/hour for a 40 hour week, split evenly between each family. If one family requests 3 hours of overtime in a week, how will it be compensated? $27/hour? Legally it can be no less than $13.50 ($9/hour at time and one half) in this situation. As a practical matter, nanny may be unwilling to work any hours, especially overtime, at less than her regular $18 per hour. Spell it out - details count. What about off-hours babysitting? First come, first served?
6. Where does the nanny work? If family A hosts the share but takes a week vacation, does the share relocate to family B's home? Is this geographically friendly to the nanny?
7. Childcare duties and expectations: What are the expectations regarding activities, naps, diet, transportation? How is a sick child handled? Iron out these details in advance. Look forward - when the babies are on table food what will it be? If family A is happy with PB&J on white bread and family B wants their child fed organic quinoa salads for lunch, this is not going to work.
8. Transportation: Will nanny be taking the children to activities, pre-school, etc.? How? Whose car? Car seats?
9. Parenting styles - establish this up front. It is generally easier for nanny if all parents on the same page - whether it be CIO or attachment or Baby Wise. She may struggle in a situation where families have dramatically different expectations on this front.
10. Nanny's notice requirements: Should not exceed the notice that parents are willing to agree to in item 3 above. Two weeks is a minimum - 4 weeks by all parties is more reasonable.
    

Lastly, consider crafting a coordinated emergency plan. 9/11 was a wake-up call for many nannies and their employers. If nanny needs to evacuate, where should she go, how will she get there, where will you meet up, who should be contacted, etc.? Are there medications or special equipment that she needs to grab on the way out? Does nanny need to deal with pets? Cell phone systems get overwhelmed in emergencies but text messaging systems are generally more stable and reliable.
Remember, details count. Putting it down in writing gives everyone a frame of reference, avoids misunderstandings and ambiguity, and generally just makes the share go more smoothly for all.

About the Author:

Kathleen Webb is the President and Co-founder of HomeWork Solutions Inc. (4nannytaxes.com) and has worked in the nanny industry since 1993. Ms. Webb is a magna cum laude graduate of Boston College. The mother of three thriving young adults, she too employed nannies for many years to care for her children when they were young.

Weekend Round Up

Don't forget to take advantage of the Fall Sale on Letters by Design
You can get 20% off your order with the sales code FALL09
Be sure to use the link above.

Monday Moxie We shared with you new information on the INA Nanny of Year and who can qualify.

Tuesday Tips Pat Cascio shared tips on how to get children involved with helping at home

Wednesday's Creative Nanny Mary Ann Meddish shared ideas about great gift ideas for parents or grandparents for the holidays or any time of year.

Thursday Table Talk Mary Ann Meddish encouraged all nannies to consider being nominated for Nanny of the Year.

Friday Financial Nanny Alice shared tips on how to manage bills that come due annually and quarterly.

Coming up this week on Regarding Nannies:
Kathy Webb shares tips on how to have a successful nanny share and Glenda shares some quick and fun Halloween Snack ideas.