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Case Study: Paying Nanny Off the Books

Posted by HomeWork Solutions on Jan 13, 2015 8:00:00 AM
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HWS' Client Care Manager, Mary Crowe, shares the story of a client who paid the nanny cash under the table, and later found himself on the wrong side of his state's unemployment agency.

Case Study Cash In Hand NannyMike and Joyce R. hired a nanny when their twins were infants. They agreed with the nanny at the time that they were going to pay her $500 a week off the books. The nanny worked out wonderfully and she stayed with Mike and Joyce for almost three years, and was let go when the twins started a full-time pre-school/daycare situation. The family’s needs had changed, and they found another very part-time nanny to cover the afterschool hours.

Their former nanny, sadly, could not find another position right away and in desperation filed for unemployment benefits to tide her over. Mike and Joyce received a letter from their state’s Department of Labor indicating that the former nanny had filed for unemployment benefits, naming Mike and Joyce as her former employers. In a panic, they called HomeWork Solutions for help getting this sorted out.

BACKGROUND

Mike and Joyce, like so many nanny employers, had heard that the nanny taxes were very confusing. As busy young parents, they very much wanted to keep things simple. Their nanny was agreeable to being paid off the books, as she too benefited (in her mind) by taking home a bigger paycheck every week. No one likes paying taxes, and so long as everyone was agreeable it seemed like the simple solution.

When Mike and Joyce contacted HWS and spoke to Mary Crowe, they were understandably anxious as well as upset at their former nanny. They needed to know what their options were and how to get out of this mess.

“My wife and I had no idea what a mess we were creating when we agreed to pay our nanny off the books. It has turned out to be the most expensive financial mistake we have made in our marriage. We are so grateful for Mary’s calm and compassion – she helped us focus on solving the problem and couldn’t have been more helpful.”

CHALLENGE

Unfortunately, their former nanny was the family’s employee under law, and Mike and Joyce were legally responsible for employment taxes. Mary explained that these employment taxes totaled about 18% of the employee’s payroll – or $12,000 over the two and a half years their nanny worked for them.  She further explained that if they had treated the nanny’s payroll legally from the very beginning, they would have collected $5000 of this from the nanny via paycheck deductions. However, at this late date the obligation to pay the entire amount was completely on the family.

Because the family’s “nanny taxes” are collected as part of their personal income tax return, they realized that they were going to have to amend three years of tax filings. Additionally, their former nanny would be receiving W-2 forms for the years in question and she was going to have to file and pay her federal and state income taxes.

SOLUTION

Mike enrolled in HWS’ payroll tax preparation service and HWS quickly registered him with the IRS and their state and obtained tax identification numbers. Mike worked over the phone with HWS’ Mary Crowe to recreate the former nanny’s pay history and HWS had prepared back tax returns in his hands the following week.

Mary chatted with Mike about their new part-time nanny, and he quickly realized that he needed to get her on the books also.

Mike immediately paid the overdue state unemployment taxes. Together he and Mary crafted a response to the state’s original query and put part of this unpleasant chapter of his life to bed. Mary educated Mike about what to expect going forward – including how the state would communicate penalties and interest. Mike understood that he needed to contact his personal accountant with the federal forms that HWS had prepared and file amended tax returns, pay the tax, and to expect penalties on those too.

Explore HomeWork Solutions' Nanny Tax Solutions

OUTCOME

Several weeks later, Mike contacted Mary again to give an update. His accountant had been able to quickly amend his federal tax returns and helped Mike and Joyce get on a payment plan with the IRS. Mike reported that he and Joyce had learned a painful and expensive lesson.

Mike was very thankful for all the hand-holding Mary had done and expressed relief that this was all behind them now. Mike advised that after hearing their story, his sister-in-law had contacted HWS the week before and put her family’s nanny on the books too.

“HomeWork Solutions made solving this problem so simple – unbelievably simple. While it was stressful and very expensive, Mary helped us through this situation with patience and understanding. Our accountant reviewed HWS’ work and said they did a perfect job. These taxes are confusing, and if we had known how easy HWS is to work with, and how costly ignoring these taxes would be, we would have definitely made a different decision when we first hired our nanny. I have already recommended them to my family and friends.”

Explore HomeWork Solutions' Nanny Tax Solutions

Topics: nanny off the books, nanny unemployment insurance, nanny taxes, nanny tax case study

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