IRS data places "nanny tax" compliance (declaration by families of their household payroll) at about 20%. Household employment experts believe even this number is optimistic. Looking at these statistics, a new household employer has to think that just ignoring this complicated and expensive issue is relatively risk free. What these numbers don't illustrate is the steadily increasing political pressure on the IRS to collect revenue, and the relatively low hanging fruit the "nanny taxes" present. Add to this the very real possibility that the elder care giver or nanny may file for unemployment benefits when the job ends, and the risk evaluation changes dramatically.
The "nanny taxes" are not just for nannies! If you hire someone to provide personal services in your private home - a housekeeper, house manager, maid, or elder care giver - you too are likely to fall under rules surrounding the "nanny taxes."
In today's economy housekeepers and nannies are finding that good jobs take longer to secure. The household who let's their off-the-books household staff go, for whatever reason, should be seriously concerned about their former employee filing an unemployment claim. The maid who was perfectly content to receive tax fee income experiences a reality check when they have no income for weeks, or months. Suddenly, filing an unemployment claim seems the only option to avoid eviction or to put food on the table. Once that claim has been filed, the whistle is blown on the former household employer. Since state unemployment systems share this information with the IRS, everyone is on notice that the family employed the nanny and that there are no tax returns on file.
This is when the laws of unintended consequences come into play.
The financial risk to the household in these cases is significant. The household employer has the obligation for remittance of the payroll taxes, not the nanny. A housekeeper who was being paid $500 cash has little or no income tax obligation on her wage - her risks for coming forward are nominal, and insignificant in the face of her lost earnings and need for unemployment benefits. The family, however, has approximately a $3700 back tax bill for just one year - and that is before penalties, interest, and the cost for professional assistance amending previously filed income tax returns. Consider for a minute that in metro areas a nanny's cash wage is often $600 - $800 a week or more and the liability grows substantially.
The family considering employing any household staff - nanny, housekeeper, maid, elder care giver - and skipping the household payroll taxes needs to seriously consider their risk tolerance.
