Advantages of Paying Your Nanny Legally
August 2, 2012 | in Nannies
Paying employer taxes is a legal requirement for all nanny employers. However many families make the choice to pay their nanny “under the table” to avoid having to pay these taxes. While this may seem like a financially beneficial choice on the surface, it can cause a lot of expensive problems. Here are some reasons why paying your nanny legally is advantageous to both employers and nannies. Employers can avoid paying back taxes, fines, penalties, and interest. At any point your nanny can trigger an audit by the IRS. She can raise a
red flag by filing for benefits she’s not entitled to, like unemployment or workers compensation, by filing an employment claim with a state office or by simply reporting her nanny income on her income tax return without submitting a corresponding W-2 form. If you are audited and you haven’t paid your nanny legally you could end up owing thousands or tens of thousands of dollars in back taxes, fines, penalties, and interest. The IRS will also scrutinize all the other information on your tax return, so if there are other mistakes, they will also
be brought to light. Employers can avoid paying claims for non-payment and underpayment of overtime. More and more employers are getting caught in this trap every year. Live-out nannies, and some live-in nannies, are legally entitled to overtime for all hours worked over 40 in a work week. Employers that don’t follow the Fair Labor Standards Act and fail to pay overtime correctly can be required to pay their nanny back wages,
interest, and in some cases, additional fees. Employers can take advantage of the Childcare Tax Credit or their workplace flexible spending plan. The government offers two great ways for nanny employers to save money on their nanny bill, but both ways require employers to pay their nanny legally. Flexible spending plans allow parents to use pre-tax dollars to pay their nanny’s wages. Since many nanny employers are in an above average tax bracket, these savings can add up quickly. Employers who don’t have access to a flexible spending plan can take
advantage of the federal Childcare Tax Credit. This allows parents to claim a credit equal to a portion of their nanny’s wages on their personal tax return. In some cases, these two things can be used together. Employers can lower the out-of-pocket cost of their nanny through non-taxable compensation. Employers can provide their nanny with several benefits that are tax free for both the nanny and the employer: health insurance, college tuition and books, public transportation used to commute to and from work, parking fees, and limited cell phone costs. By offering these benefits parents can lower the out-of-pocket costs of employing a nanny. Their nanny will also save money because she won’t have to pay taxes on the benefit amount. Employers that pay their nanny legally are often more attractive to job hunters. There are many benefits to nannies that are paid legally. Many quality caregivers, especially nannies interested in staying in a job long term, look specifically for employers who pay taxes on their nanny’s full gross income. This means employers who choose to go the “off the books” route can lose out on some great candidates during the search process. Paying legally is a way to show your nanny you view her as a professional. When a parent chooses to hire a nanny, that parent becomes an employer. Accepting the responsibilities that come with being an employer, including paying taxes, is a wonderful way to show your nanny you value the work she does and recognize her as a childcare professional. This attitude is the key to a successful, long term nanny / family relationship and is one of the top reasons a nanny stays with a family over the long haul. Your nanny will be able to collect unemployment if you have to let her go. Unemployment benefits are an important safety net for caregivers that have lost their jobs, especially in today’s economy. It’s important to provide your nanny with this financial resource to fall back on in case she’s not able to leave your position and quickly begin a new one. Your nanny will be able to provide proof of her income. This is extremely important to nannies who are trying to purchase a car or a home, rent an apartment, or build a credit history. Paying your nanny legally offers a lot of benefits to both you and your caregiver. It’s also much less costly
than most people think. By structuring your nanny’s salary and benefit package to take advantage of tax credits and non-taxable compensation, many families can save a significant amount each year.
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