Understanding the Nanny Tax
By Shelley B. Drevas, CPA
“Of course I need to pay taxes,” you may be thinking, but many people only take jobs when paid cash “under the table.” While illegal, this seems to be the norm in many industries, especially caregivers.
According to Tom Breedlove of Care.com, in 2015 less than 10% of all caregivers were paid “above the table” and the number has been declining over the past two decades. Many of them work under the table in order to receive benefits needed to supplement low wages. This results in billions of tax dollars not being paid into the system which could actually be available to workers if they were paid as an employee.
This is commonly known as “nanny tax,” it includes caregivers, babysitters, cooks, housekeepers, yard workers, etc. and applies to anyone who (in 2019) pays a household employee more than $2,100 per year. If you do, you are considered a household employer, subject to payroll and unemployment taxes.
But what the worker doesn’t know is that being an employee might actually benefit them. First of all, by being an employee they will have social security taxes paid into the system. Retirement benefits are calculated using the 35 highest years of earnings. Showing little to no earnings for several years could significantly reduce retirement benefits.
Household employees may also be eligible to collect unemployment if they lose their job through no fault of their own. Senior caregivers especially could suddenly lose their job. Household employees can also be covered under workers comp insurance for any injuries on the job.
For household employees with children, they might be missing out on some or all of the ‘earned income tax credit.’ It’s based on EARNED income and workers may yield a larger credit by having more income, depending on their situation.
What if you need a loan from a bank? If you are paid cash under the table, that money cannot be used as verifiable income. You can’t even say you’re employed without opening up a can of worms.
For the employer, not only are you missing out on deductions (e.g. medical) or credits (e.g. dependent care), you could easily be caught not reporting these wages which could lead to an IRS audit resulting in penalties, interest or worse – tax evasion charges. Professional licenses could also be in jeopardy.
Preparing payroll, filing and reporting taxes is time consuming (IRS estimates 50-55 hours/year), so professionals can help. For both household employers and employees, this can give peace of mind knowing that things are being taken care of correctly.
Call Shelley at 828 200 1556 about your tax concerns.