You’ve hired a nanny and now comes the details of getting payroll set up with proper taxes withheld. It might seem like a good idea to pay your nanny partly on the books with the rest of payments off the record, because it could save you on taxes while still contributing to her work history. However, there are a variety of reasons you should not go this route, which we cover here.
#1: This could impact unemployment benefits.
If your nanny leaves her position with you, government unemployment benefits will only be based on wages that were reported on the books. She may not be aware of this and when she files for unemployment and reports her weekly wage, the two numbers will not match. That means there will be an underreported earning amount which may trigger an audit by the state's Department of Labor and she will be delayed getting the full wage replacement calculation that she may be expecting.
A discharged nanny's unemployment benefits claim is the #1 way families and nannies get caught under-reporting her wages.
#2: It’s dishonest.
Not reporting wages paid to your nanny to the government is not honest. It cheats the nanny out of full benefits later, it cheats the government, and it could negatively impact your reputation as an honest employer. In the rare case where you are pursued with criminal charges, your professional licensure with the state can be revoked. In most cases the state will agree to allow you to voluntarily amend your prior filings, and pay the back taxes and penalties. Since most states communicate this information to the Federal government under information sharing agreements, you will have to quickly amend your annual 1040 tax filings (which you submitted as true and complete under penalty of perjury) and pay the back tax and penalties, You will be responsible for the entire Social Security and Medicare shortfall, both employer and employee contributions at this point. (Read a Case Study)
#3: It could cost you.
If you end up getting caught under reporting and not withholding appropriate taxes from your nanny’s wage, you could end up paying some big fines. These typically run thousands of dollars and it’s simply not something you want to risk. Remember, every nanny job has an expiration date as the children grow and your family's needs change. You will eventually part ways.
#4: It could cost your nanny.
Nannies often agree to part on | part off the books compensation in order to preserve benefits such a free or taxpayer subsidized health insurance. They don't realize when you get caught, they get caught. Next thing they know they have to change THEIR tax returns, pay extra income taxes, and may find future wages garnished too by the state to recoup the cost of benefits paid but not due.
If the thought of setting up your nanny’s payroll taxes seems daunting, don’t worry. Our experienced professionals at HomeWork Solutions can do all the work for you. Contact us today for information on getting started.