California is striving to shine a light on its underground economy. At the end of 2011, the LA Times reported that employers who pay their workers under the table - to avoid payroll taxes, workers’ compensation insurance and other government mandates - cost the state about $7 billion annually in lost tax revenues. Last week, California’s Labor Enforcement Task Force set up a public hotline for workers and employers to call in complaints and provide enforcement tips. Employers who are playing by the rules want to create a level playing field by "ratting out" their competitors who cheat. One state official notes, “The hotline will be a valuable tool to gather information and bring into compliance those employers who treat workplace safety and wage and hour laws as a nuisance”.
The trend towards stepped up enforcement is pervasive. The California hotline targets businesses but also applies to household employers and workers. (Last week I reported that a new hotline was set up in New York specifically to educate in-home workers about their rights, and to assist workers in filing complaints against employers.) In a time of budget deficits, coupled with higher demand for unemployment benefits, state leadership is highly motivated to find ways to collect more taxes. Bankrupt state unemployment funds are of immediate concern today. Policy makers should focus on what happens to the millions of “off the books” workers down the road when they want to retire and learn they have no benefits? Workers in this underground economy do not participate in the safety net of Social Security or Medicare. While personally painful for each individual worker, the financial and social costs to the country when these workers begin to age in large numbers are difficult to calculate.
Individuals and families employing workers in their homes - housekeepers, nannies, personal care aides and home health aides - have the same responsibilities as business employers to pay employment taxes and unemployment taxes. You might assume the numbers of in-home employees are small and the lost tax revenue insignificant. That is not true. In 2009, the amount of uncollected Social Security, Medicare and unemployment taxes was conservatively estimated at $5-10 billion annually for in-home employees. And the number of personal care aides and home health aides - the two fastest growing occupations in the US - is expected to double by 2020 to 3 million workers. (Bureau of Labor Statistics)
The magnitude of uncollected household payroll taxes is significant and growing. Not surprisingly, enforcement initiatives for household employers are also on the rise. The Department of Labor now shares information with the IRS. In fact, the most common way for a household employer who is skipping payroll taxes to get caught is when a former employee files for unemployment benefits. The IRS is notified and the household employer has to pay back taxes, interest and penalties.
If you are a household employer you need to understand your responsibilities. Download our free Tip sheet: “Common Nanny Payroll & Legal Mistakes”. The "nanny tax" does not just apply to nannies; it applies to all in-home workers. Act now to protect yourself, your family and your employee.