How Nanny Tax Compliance Benefits Families and Employees

Nannies hold jobs like any other professional and should be paid legally to gain important protections and advantages.

For families, domestic law compliance benefits and protects you and your family as well as your employee. It may seem easy to pay “under the table.” However, that’s a roll of the dice. One that you may not be able to afford.

Let’s start with nannies. If you earn more than $2,000 from one family during the year, you will need to pay taxes. But the benefits will far outweigh the small amount taken out of your paycheck.

Here are some of the protections and benefits of being paid “on the books.”

1. You have a verifiable income.
   If you apply for a car loan, student loan, mortgage or even a credit card, you’ll need to show that you can pay monthly installments. Being paid legally provides that. If your pay is not documented, you have no way to show that you have income.
2. You have a legal employment history.
   Getting paid “on the books” creates a work history. This is also important when applying for a loan, credit, or your next job.
3. You can receive unemployment benefits.
   Employers are required to pay an unemployment insurance tax. When paying legally, your family (employer) will do the same. If you lose your job, through no fault of your own, unemployment benefits will partially replace your lost wages for up to six weeks while you look for a new job.
4. You can enjoy Social Security and Medicare benefits.
   You and your employer will pay Social Security and Medicare taxes. This money is set aside to help pay for living and medical expenses when you retire. If you are paid “under the table,” you don’t receive these benefits and may need to continue working past retirement age.
5. You may be eligible for a health care subsidy.
   The Affordable Care Act requires everyone to have health insurance or pay a fine. A health insurance marketplace has also been created to help people find coverage. If you buy a policy through this marketplace, you could qualify for a subsidy and cut the costs of your insurance. Provided, of course, you are being paid legally.

Families can also enjoy several benefits by employing their nanny the right way.

1. You’ll attract higher quality candidates
   When you hire a nanny, you’re bringing a professional on board. They expect the same benefits and protections of being paid legally afforded to those who work in an office, retail store, restaurant or other type of workplace. By doing payroll and taxes the right way, you’ll pick from a larger pool of qualified candidates and have a better chance of finding the right fit for your family.
2. You’ll work with a happier employee
   Your employee will appreciate the benefits and protections of being paid legally. They have a verifiable income and legal employment history when applying for a loan, credit card or subsidy in the health insurance marketplace. Also, you and your employee will be paying into their Social Security and Medicare accounts. By treating them like a professional, they have higher job satisfaction. This leads to a happier family and an easier work relationship with your employee.
3. You’ll gain financial protections
   Workers’ compensation insurance may be required for household employers in your state. The proper coverage ensures that some of your employee’s medical costs and lost wages will be covered if they become ill or are injured on the job. Without it, your employee can sue you for lost wages if they are hurt on the job and you don’t have the required coverage.
4. You may avoid state and federal fines and penalties
   It’s easy to get caught paying under the table. All it takes is your employee filing for unemployment after you part ways and listing you as their previous employer. They’ll be denied benefits and you’ll come under scrutiny for not paying the proper taxes. Or, your employee is injured on the job and goes to the emergency room. When they are asked how it happened, they mentioned it was at work. The injury will be reported to your state’s workers’ compensation board, which means you’ll receive a hefty fine because you’re noncompliant and don’t carry the required insurance coverage.
5. You may reduce the risk of an audit
   Once the federal government realizes you haven’t been compliant with household employment law, your chances of being audited skyrocket. The audit could just be a hassle if you’re not hiding anything else. However, you’ll likely need to pay back taxes or a fine for paying your nanny “off the books.” According to The Motley Fool, failing to pay employment taxes can cost on average $25,000 in penalties and interest.
6. You may take advantage of tax savings
   Your employer’s Flexible Spending Account and/or Dependent Care Assistance Program and the federal Child and Dependent Care Tax Credit can cover some of the qualified expenses associated with being a household employer.
7. You’ll enjoy peace of mind
   All of these benefits lead to one major advantage … peace of mind. You’ll have a solid relationship with your employee and financial protection. You won’t have to concern yourself with fines, penalties, audits or lawsuits. Even if you are audited for an unrelated matter, you won’t have to worry about household employment raising red flags. Your career advancement may also depend on being compliant with all tax laws – even those that deal with household employment.

GTM Payroll Services relieves the administrative hassles of household payroll for families by providing a one-stop shop for payroll, tax filings, compliance and insurance. No risk. No hassles. No worries. If you have any questions about domestic employment, contact us at (800) 929-9213 for a free, no obligation consultation.