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Nanny Wages Part On and Part Off the Books?

Posted by Mary Crowe, FPC on Dec 31, 2013 7:53:00 AM

 'Oh what a tangled web we weave when first we practice to deceive' 

No one sets out to deceive when it comes to paying their taxes but sometimes people with good intentions make a decision that can cause them to under pay their tax obligations, completely unaware of the risks involved. One bump in the road, and the household employer can get themselves into weeks of headaches and expenses.

Simplify the Nanny TaxTrue Story: Case in point, the true story of The Crowe Family of New York (the names have been changed to protect those involved). They are busy family of working professionals with 4 year old twins and a nanny named Brenda.

The Situation: When Brenda started, the Crowes agreed to pay her $800 a week. The nanny asked if it would be ok if they said she was making $400 a week so that she remained qualified for subsidized health insurance. In other words, Brenda asked to be paid part on the books and part off the books. The Crowes happily agreed, not even thinking of what that could mean to them farther down the road.

They had us prepare their quarterly tax filings using the $400 a week and paid the tax amounts due on time each quarter.

Fast forward a year and a half later when the twins started kindergarten and the Crowes found they no longer needed a full time nanny. The Crowes and Brenda parted ways amicably, and the family gave their nanny both a great recommendation and an assist to find a new job by posting for her on a neighborhood website.

Brenda didn't find a new job immediately, and filed for unemployment benefits. When she completed the unemployment forms, she stated she was paid $800 a week. This caused the unemployment staff to raise a red flag as the employer (The Crowe’s) had been reporting and paying taxes based on $400 a week.

Now the Crowe’s are faced with a dilemma. Should they correct the record and pay the associated taxes and penalties, or should they "stick to the story" and sign paperwork under penalty of perjury disputing the nanny's claim? What do to, what to do.

The (Painful) Resolution: In the end, The Crowe’s corrected the reported amounts paid to Brenda and paid the additional taxes owed. In addition, they paid New York State over $1200 in penalties/interest. And the Crowes had to amend their previously filed Federal tax returns and correct the employee's W-2. Oh and did I mention that they also had to pay the additional Federal taxes and interest? What a headache!

In today's economy, nannies are spending longer periods between jobs and many who were happy to be paid in cash in the past realize that unemployment benefits are the only things between them and eviction. Faced with these difficult choices, the nanny will "give up" the former employer, creating weeks of headaches and expense for the former employer. All the more reason to do things right the first time!

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About the Author: Mary Crowe, FPC is HWS' Client Support and Quality Assurance Team Lead. Mary joined our team in 2011, and assumed these responsibilities in October 2012. Mary's focus is client support and internal Information Technology support, her core competencies. She brings 15 years of successful client services experience, along with strong team building and problem solving skills, to our team. 

Topics: nanny payroll tax

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