Hiring a nanny to care for children, or a caregiver for an elderly family member can be very expensive. These employees often work long hours and your need for their services is generally perpetual. The high cost of employing household workers often makes it tempting for families not to report paid wages, since reporting carries additional financial requirements related to unemployment insurance and other benefits. However, the risks to families who do not pay their domestic employees "on the books" are considerable.
If you pay your domestic employee off the books, you and the household employee are committing tax fraud. You file federal income taxes on penalty of perjury, and failing to report domestic wages can potentially be charged as a felony offense.
If you are caught, both you and your employee will be responsible for back taxes and penalties, not to mention legal fees incurred during the process. There is no statute of limitations on this crime, which means that you could get caught at any point in the future. Even after the employer's death, the estate can be held liable for back taxes.
Unemployment & Social Security
Tax contributions to unemployment insurance is a required component of employment, as is the payment of Social Security and Medicare taxes. If a household employee is paid "off the books," and these benefits are not funded by the employer, situations still exist where this omission can be revealed. For example, you may have to let a nanny or caregiver go because the children grow up, or living conditions of an elderly relative shift from at-home to a live-in care facility; or an elderly person may have passed away. At any point, the employee may file for unemployment or social security benefits, even many years down the road. This is often the point where families get caught not paying the required taxes and insurance for domestic employees, as the issue is brought to the attention of the government.
On the flip side of this issue, paying a domestic employee on the books means that your employees have a safety net. Sharing or assuming the tax, social security, workers' compensation and unemployment requirements means your employee is protected against unforeseen circumstances, and this constitutes the right thing to do from both a legal and ethical perspective.
Affordable Care Act Benefits
Many household workers such as a nanny, housekeeper or senior caregiver are income qualified for federal tax subsidies that help keep their health insurance affordable. The IRS administers these tax subsidies, and a household worker must have their income on the books to receive the subsidy. Nanny tax compliance becomes more of a family moral imperative when your worker's health benefits are on the line.
If you have a domestic employee, it's very important to invest in workers' compensation insurance, which you can't simply buy if you pay a nanny or caregiver off the books. Without this insurance, you will be personally held liable in the event that a worker decides to sue you after being injured on the job. Elder care involves a great deal of manual labor in the form of helping the senior get in and out of the bed or car, which can often result in back injuries. As a result, the possibility of being sued for workers compensation is one of the risks to families who do not pay their domestic employees on the books. Although some people feel that their employee would never sue for workers compensation, the fact is they have the legal right to compensation for injuries incurred on the job. In the event of expensive medical care, suing an employer is often the only option available to pay for medical care, particularly if the injured party doesn't have health insurance.
Although paying a household employee off the books without reporting wages to the government can seem like a simple or even logical solution to taxes for both you and your nanny/caregiver, the risks to families who do not pay their domestic employees on the books are simply too high. Beyond the moral imperative to pay a domestic employee on the books, there are practical reasons that make this essential an essential step to insuring a secure future for all involved.
Workmen’s Compensation Protects Elder Care Families, Too
Hiring household employees presents a unique example of the value of Workmen’s Compensation. Elder care workers, nannies and caregivers for the disabled are often confronted with routine physical work that can develop into chronic injury. Without it, employees have limited coverage in the event of an on-the-job injury. If an employee is without health insurance, has a very high deductible, or only has poor coverage, the other avenues for recourse are timing consuming and bureaucratic. In fact, the employee may have no other recourse but to sue an employer for medical costs or lost wages.
It is not unusual for a nanny or home health aide to sustain back injuries due to the strain of lifting, moving, dressing and hygiene activities related to proper care. The nature of the work demands fair compensation for medical bills and lost wages associated with the work, and Workmen’s Compensation provides this without it, employers and their families are subject to lawsuits and financial risk.
Worker's compensation is required by many states, including California, for people who employ household employees including elder care workers, nannies, housekeepers, gardeners, and cooks. Worker's compensation is an efficient way for employers to protect employees, since it only pays for healthcare costs and lost wages that occur in the case of an on-the-job injury; it is a form of protection for all parties, not a form of health insurance. Even in states where there is no legal mandate for worker's compensation, it's still a good idea to protect your family by investing in it.
Risks when Compensation Is Not Available
If you do not have workmen's compensation, you will be personally held liable for the lost wages and medical bills of your injured employee. With the magnitude of modern health care costs, being sued for these costs can be a devastating, or even bankrupting event.
Workers are entitled to compensation for a wide range of on the job injuries, including those as simple as slipping and falling on the job. Except in cases of negligence, your employees are entitled to compensation for their injuries regardless of fault.
Benefits to Worker's Compensation
There are numerous benefits to getting workmen's compensation when hiring household employees. Not only do you protect your own family against legal action, you also protect your employee in the case of injury. Although employees have recourse through the legal system in the event of injury, it can take months for such cases to be resolved, and in the meantime they are responsible for paying their own bills, which can become very costly. With workmen's compensation, injured workers are able to receive the compensation they are entitled too much more quickly. This is especially important for low-income workers, or for those who have sustained serious injuries.
Obtaining Worker's Compensation
Getting workmen's compensation when hiring household employees need not be an expensive or complicated process. In fact, in California, worker's compensation is easily available as a rider to your home owner's policy. However, you should never assume that it is automatically a part of your homeowner's policy, because you will need to add it on to your existing policy. When it comes to cost, the exact premiums will depend on the number of employees, the type of coverage, and the work the employees do. Your insurance company will be able to give you policy and premium details.
For more details on paying your household employee on the books, download our free Household Payroll Guide.