The Internal Revenue Service (IRS) requires that anyone who pays a household employee—whether it’s a gardener or a house cleaner—more than $1,800 cover taxes for that person. Yes, that means parents who hire a nanny to care for their kids full- or part-time are required to withhold Social Security and Medicare. Additional unemployment and state taxes also apply. Generally, the total amount comes out to be about 10 percent of the employee’s salary.
Do most people pay what’s known as the nanny tax? That’s a question most parents don’t want to answer because an estimated 80 to 95 percent do not.
And it’s thought that the number of nanny tax evaders has increased in the last decade because more families are finding and hiring their nannies themselves through websites. In the past, parents commonly worked with an agency that walked its members through the tax process. Today, many parents are faced with handling the taxes. They become overwhelmed by the responsibility and just don’t do it.
What’s more, many don’t want to pay the money. For a middle class family with working parents, the cost of a nanny is a significant portion of their income and taxes can make the price even higher. Nannies also often prefer to get paid under the table because they know they’re bound to get a higher salary, or maybe they’re undocumented and prefer to stay under the radar (even though the IRS is purely interested in collecting revenue and doesn’t care whether the caregiver is legal or not).
In a world in which child care can cost as much as college, parents want to maximize their dollars too. If the nanny who seems like the best fit for their family can’t afford withholding, and the parents can’t afford to gross up her pay (without losing hours they need to be at work), many choose their family’s well-being over the I.R.S.
There are two components to what’s known as the nanny tax: the employer contribution and the employee withholding. “The employer contribution includes Social Security, Medicare, federal unemployment and state unemployment taxes,” according to the Chicago-based Nanny Tax Company
that will help you get your household help taxes paid.” The employee withholding includes Social Security and Medicare and possibly federal, state and city income taxes.”
Employees must file taxes quarterly and requirements vary by state. A parent can reduce the expense of the nanny tax by using a Flexible Spending Account offered by your employer or the Child and Dependent Care tax credit.
People are rarely caught for evading the nanny taxes but they can get into trouble when a household employe without a job files for unemployment and Uncle Sam finds that the funds don’t exist to cover the individual.
“Violators are subject to paying back taxes as well as penalties that compound annually for as long as an employer fails to fulfill their obligations,” according to Yahoo Finance
What do the experts say? Well, they say that you should pay your taxes. “Taxes aren’t optional — they’re the law,” says Bob King, founder of Legally Nanny, a law firm in Irvine, Calif. toldCare.com
. “You can’t buy something at Target and say, ‘hey I don’t feel like covering that sales tax.’ And you can’t hire a nanny
and decide not to pay her income tax.”
“It’s…the right thing to do, as parents who want to teach our kids to play by the rules, and as taxpayers who want to pull our weight in society,” writes New York Times
business writer Jacoba Urist.
And most importantly, paying the tax is what’s best for your nanny and she’s the one who’s caring for your child day after day.