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Do you pay the nanny tax?

Categories: Money, Parenting & Family

9 comments

Between 80 and 95 percent of people who employ nannies, babysitters, and housekeepers don’t pay employer taxes for these employees, says a recent New York Times article. At first I was surprised and then, embarrassingly realized that we’d been guilty of this ourselves at one point. (I guess I should list my phone number here so that IRS has a convenient way of reaching us after reading this.)

This is a fairly high “cheat” rate, but as I read the article I, along with the article’s author, was shocked at the endless bureaucratic steps that families have to go through to actually do the right thing.  They are truly endless and extremely time consuming and as I think about the hectic daily schedules working families are juggling, no wonder many are choosing to not go through this mess. There are eight steps involved and some of the steps have many mini-steps as part of them.

Of course, there are very good reasons to pay the nanny tax. If your nanny (or housekeeper) files for unemployment after she stops working for you, for whatever reasons, and names you as her last employer, unpleasant things will happen and you may spend a lot of time with folks from the IRS. If you decide to run for public office, not paying employer taxes for your housekeeper or nanny will certainly get you in trouble, just ask Caroline Kennedy or Tim Geithner. If you do put your nanny on the books you can use the Flexible Spending Account, through your employer, to pay her for up to $5,000, and this is money that comes out pre-tax from your salary. And, as the article points out, paying the nanny thing is just the right thing to do.

I was going to ask you to share whether you pay or paid the nanny tax or not, but that’s probably asking for too much information. So instead I’ll ask what you think about this — are you surprised the “cheat” rate is so high? Or does the insanely time-consuming process of actually doing what the IRS want you to do enough of a deterrent for a busy working family?



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9 comments so far...

  • I feel that it is wrong for many of these people to be treated as “employees.” Many of them are really in their own business and while they should be paying taxes (including self-employment tax, the equivalent of social security/medicare), it should not be the responsibility of the people using their services. I don’t expect to file tax returns for the guy who mows my lawn or plows my driveway, the mail carrier, the maid service, the paper carrier, or the people who do my dry cleaning. Even in my profession (law, CPA, consulting, take your pick), I could be in my own business or an employee of someone else. It’s my choice. I don’t see why the same option isn’t open to everyone.

    I mean, my maids need to pay taxes. That is their responsibility. Do they in fact pay them? I don’t know. That is between them and the IRS. Now my nanny - she has several businesses. I do not have 100% control over what she does. She earns enough off my kids to get a 1099, meaning the IRS will be informed of her income and she knows this. She has a CPA working with her on all her tax requirements. I don’t see how the government can declare that I must presume her incompetent to pay her own taxes AND that this is somehow my problem.

    SKL  |  January 26th, 2009 at 12:38 pm

  • We pay employer tax, and our portion of social security and state disability for our nanny, if that’s what you mean. Do we pay her the amount that she has to remit to the IRS and state for her portion of the taxes? No–we too feel that is her responsibility. So yes, her wages are “lower” than what her gross is, but then, we all get paid less than what our gross annual salary is!

    spacegeek  |  January 26th, 2009 at 3:12 pm

  • If you employ them, you should pay their taxes. You’re the employer and they’re the employee. Its work so pay your nanny for it.
    Now , I don’t know all the ins and out of the law and taxes though I am willing to learn but it’s the right thing to do in my opinion and even if the nanny has a side job as many do nowadays, that should not effect you, the employer, as long as she or he is doing their job the way they are supposed to.
    I am currently a full time nanny and a business owner. I refuse to work off the books nor do I want a 1099 like an independent contractor. People who want to have nannies and refuse to pay them properly ( I’m talking about the ones who pay off the books)are low. Many nannies are duped into working this way without knowing or being given their options so no I’m not surprised by the cheating. If you can’t pay up properly then the last thing you need is a nanny.

    Moore  |  January 28th, 2009 at 5:21 pm

  • To Moore: I should point out that if you are a nanny and have another business, it could be to your benefit to work as an independent (”1099″) contractor, because you could offset the expenses and losses of one business against the other and thus possibly save self-employment taxes. I am not sure why you don’t “want” a 1099, but I feel it ought to at least be an option you can negotiate with whomever you work for.

    SKL  |  January 29th, 2009 at 2:42 pm

  • While a bit of a pain, it wasn’t all that onerous to file with my state and get the process going to pay our Nanny’s social security and state taxes. While our caregiver requested that she be “on the books” I believe many prefer to pocket the bit of extra cash. In our case, we split the cost of taxes with our caregiver.

    Heather P  |  January 30th, 2009 at 2:40 am

  • I’m a lawyer, with a nanny, and my husband and I are trying to play by the rules and pay our nanny’s taxes, etc. We’re just in the process now of doing our first year’s filing for 2008. It is all a surprising pain, but there is software you can buy to help out with the process. I know some would say that that’s the point — that it shouldn’t be so difficult to comply that you have to buy software to help you!
    But still - I must say that I am surprised that the vast majority of my colleagues, who are technically “officers of the court” as attorneys, and who could ostensibly risk being disbarred for failure to comply, choose not to pay nanny taxes. I think this shows how low people feel the risk of getting caught by the IRS for this is. It’s like an “everybody’s doing it…” (or rather, “nobody’s doing it”) argument that seems to justify their choice.
    Anyway, I just want to say that for all of these people (my colleagues) the decision not to comply seems largely driven by cost — NOT by wanting to avoid hassle, or a time consuming process. They wouldn’t even be aware of the process, b/c they’ve never particularly looked into it. It’s purely a “my nanny costs X, but would cost X + something if I had to pay taxes, too” thought process. Believe me, I know from experience that it’s not cheap to pay, but on the other hand, as one of the “suckers” in the 5% who are actually trying to comply, it does irk me that these folks, who are quite well paid themselves, choose not to comply. If you go to buy a sofa and think, “oh, but with the tax, I can’t afford it” then you just don’t buy it. It’s funny to me that people are able to look at this particular taxing situation so differently.

    Kate  |  February 2nd, 2009 at 2:54 pm

  • The paperwork is really not that difficult. We’ve done it for three nannies already, and it gives me a peace of mind to do this the right way. We did not use software, and I think people who say it is too difficult have not really explored the option. That said, I do think that the $5,000 tax credit is appallingly low. If it were higher, I think that more people would be incented to comply with the law, and the resulting higher social security/income tax revenues should more than offset any credit.

    FL  |  February 4th, 2009 at 2:19 pm

  • We went with an au pair to avoid these issues. Good childcare is so hard to find and so important in child development. Why are we so concerned about taxing it into non-availability for working moms? I thought we were trying to encourage moms to be able to work when they can rather than put up more barriers to entry.

    Sarah M. in Seattle  |  February 6th, 2009 at 6:50 pm

  • To avoid all the fuss it’s easier to hire someone. Please read this article on Nanny Tax Service (http://bit.ly/eOU604) to help with your 2010 taxes.

    Tax 4 Nanny  |  April 27th, 2011 at 4:30 pm

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