There is an excellent article on the Washington State Workers Compensation Insurance Blog that outlines the dangers of not paying the nanny taxes, and the potential benefits to the employer for nanny tax compliance. Quoted is one of HomeWork Solutions' favorite go-to industry experts, attorney Bob King of Legally Nanny.
Paying a nanny under the table (not declaring her wages and paying the associated nanny employment taxes or income taxes) can be the wish of either the employer or the nanny. Employers often prefer to pay cash because it is cheaper for them, although the complicated paperwork is often the articulated reason. Nannies often prefer cash payments because they believe they take more money home when they don't pay the taxes.
This in fact can be a risky proposition for both parties. Avoiding the nanny tax causes the family to sign personal income tax returns that are knowingly fraudulent - a felony. Jail isn't the real risk, but rather a future security clearance (if you work for government or government contractors), a license to practice law, or the pain and expense of amending tax returns later when the nanny realizes they really did want a W-2 and threatens to report the wages you paid her anyway.
Nannies will often fall back on unemployment insurance when the job ends, especially in today's troubled job market. The act of filing for unemployment benefits immediately "outs" the employer, and at the end of the day the employer will end up paying both employer taxes, and employee (nanny) taxes that the employer was legally obligated to collect. This is a very expensive proposition for the employer, and the employee's unemployment benefits may be delayed several weeks as a result.
HomeWork Solutions provides "catch up" services for hundreds of nanny employers every year when what seemed like such a good idea in April when the nanny was hired suddenly doesn't look like such a good idea after talking to the tax preparer and facing signing the Federal 1040 under penalties of perjury. Call today (800.626.4829) or visit our website for more information.