The Benefits of Paying Household Workers Legally

| June 22, 2016 | 0 Comments

household workers

Surveys show that 26% of Millennial parents’ increase their working hours following the birth of a child – double the amount of Generation X parents.

This devotion to career has prompted families to seek out reliable domestic workers, who can care for their children, and other dependents, when they aren’t able to.

Filing, calculating, and paying “nanny taxes” can be a confusing and intimidating process – so much so that many families avoid them entirely, and often pay their caregivers illegally “under the table”.

While paying your nanny under the table may seem like a good solution, it can actually lead to a lot of problems, as you are legally required to pay employer taxes on your household worker.

Fortunately, there are many benefits involved with paying household workers legally, and ways make the process easier, which can benefit you, and those who care for your loved ones, in equal measure.

1.      Legal Payment Helps Your Employee

The chances are that you respect, and appreciate your household employee for the work that he or she does on your behalf. These are the people that look after your loved ones when you can’t, and while giving them undocumented “cash-in-hand” payments may feel the same as paying above board, it actually has serious consequences for your nanny.

Without a documented employment history, domestic workers employment records can appear incomplete. When a domestic worker receives payment without tax documentation, he or she loses access to unemployment and disability benefits, worker’s compensation, Medicare, and even Social Security.

Publication 926 (2016), Household Employer’s Tax Guide

You have a household employee if you hired someone to do household work and that worker is your employee. The worker is your employee if you can control  …

 

In other words, paying your worker under the table could mean they can’t look after themselves or their own family when they stop working for you.

Paying your employer taxes gives your household worker all of the benefits and protections other professionals enjoy, while helping to build a credit history that allows him or her to qualify for loans, mortgages, and rental opportunities.

What’s more, not only are you doing a good thing for your employee, but your willingness to treat him or her as a professional is likely to prompt a longer, more stable business relationship.

2.      Legal Payment Protects You and Your Family

Most families who pay their domestic worker “under the table” do so because they believe it to be cheaper and easier. They often fail to recognize that taking this course of action is illegal. If, and when, the government catches you, you could face a charge of federal tax fraud.

There are numerous circumstances that could lead to an investigation into your taxes, such as your nanny filing for social security, unemployment, worker’s compensation, or disability benefits.

In some situations, the IRS may even notice the same amount of money moving from your bank account every so often, and become suspicious. No matter the reason, any scenario that leads to an investigation could end with you facing considerable consequences.

At a minimum, you will have to back-pay all of the taxes (including taxes you were responsible to withhold or deduct from your caregiver’s pay), interest, and penalties, and you may also face federal charges of tax evasion or perjury.

In serious circumstances, federal tax fraud can result in fines of up to $250,000, imprisonment, and a criminal record.

3.      Legal Payment Provides Tax Breaks

Last, but not least, families who pay their household workers legally are often entitled to at least one dependent care tax break. The available tax breaks can help to remove a lot of the additional costs associated with paying workers legally, and most families are shocked to find how affordable it can be to handle things from an “above board” perspective.

Household worker insurance – worksafe.qld.gov.au

Jul 17, 2015 If you employ a household worker in Queensland, it is compulsory to take out a Household Workers‘ Insurance Policy to cover you against …

 

Some families actually come out ahead by paying legally, because their tax savings outweigh the tax costs associated with being an employer. The available tax breaks include:

  • Flexible Spending Account (FSA) or Dependent Care Account – Allows families to pay for up to $5,000 of qualifying expenses with pre-tax dollars.
  • Child or Dependent Care Tax Credit – Allows families to itemize dependent care expenses for up to $3,000 per child (maximum of $6,000) tax credit.

Legal Payment Is Always the Best Option

While it can be complicated to manage the domestic employer tax process, there are solutions that can make hiring a household employee easier, and navigating household payroll taxes can lead to numerous benefits for both you, and your worker. By paying legally you can:

  • Avoid costly penalties and fines
  • Protect yourself as an employer, and your family
  • Help your worker build an employment history
  • Benefit from useful tax breaks

 

Contributed By: Kathleen Webb Co-founded HomeWork Solutions in 1993 to provide payroll and tax services to families employing household workers. Kathleen has extensive experience preparing ‘nanny tax’ payroll taxes. She is the author of numerous articles on this topic and has been featured in the Wall Street Journal, Kiplinger’s Personal Finance, and the Congressional Quarterly. She also consulted with Senate staffers in the drafting of the 1994 Nanny Tax Law.

Webb is a magna cum laude graduate of Boston College. She currently serves as Co-President of the International Nanny Association, the leading professional association in the in-home childcare industry.

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