As a nanny or caregiver, you may be aware that you’re considered a household employee, not an independent contractor. So when you interview with a new family who tells you they’d rather not pay taxes, you might be caught off guard. The family may think they’re helping you out by letting you bring home a little extra money, but what they may not realize is that it’s illegal to do so.
“Traditionally, people see these relationships as more informal and not employer/employee,” says Dean Rocco, a partner with Wilson Elser. They don’t pay taxes to skirt the law intentionally; they just don’t know about the law.
But what do you do if your employer isn’t interested in paying taxes? Follow these steps:
1. Prepare to have a constructive conversation
“It is always helpful for a nanny to do some homework first so that she understands her rights before raising these issues with her employer,” says Lisa Pierson Weinberger, an employment law attorney and founder of the Law Office of Lisa Pierson Weinberger. As employees of the families they work for, in-home caregivers have a right to the benefits associated with the payroll and tax process.
If you don’t say anything, your employer might assume you’re OK with being paid under the table. Even if you’ve talked about it in the past, talk about it again. Tell them you’re uncomfortable with getting paid in this manner and want to get on the right track. “I always advise clients to be matter of fact and to avoid placing blame or becoming too emotional,” adds Weinberger.
2. Explain how being paid under the table affects you
As a household employee, it’s illegal to not have taxes withheld from your pay and for the family to not pay taxes of their own. If either you or the family are audited by the IRS, it can lead to a financial headache that may take months to clear up. Additionally, here are some other negative consequences to mention:
- You won’t be eligible for unemployment benefits if the family lays you off because they haven’t paid into the unemployment insurance pool.
- You’re losing out credits with the Social Security Administration that will help determine your Social Security and Medicare benefits when you retire.
- You won’t have a way to document your income, which is necessary for things like a car loan, a mortgage loan, an apartment rental and other lines of credit.
3. Help the family understand what to do
If you are prepared with what needs to be done before having a conversation with the family, they might not feel overwhelmed with the process. Refer to our article on how to start paying your caregiver on the books to find out what forms need to be filed and where to get help.
Even if you’ve been paid under the table for a while, the problem is fixable. If you or the family are close to reaching an agreement and afraid of missing the April 15th deadline for filing your personal income taxes, you can file for an extension with the IRS.
4. File your taxes with a substitute W-2 form if necessary
If your employer is against paying taxes, it does not absolve you of your responsibilities to file a personal income tax return. Instead, you can file a Form 4852, which is a substitute form for the Form W-2 the family should have provided you. Unfortunately, the form requires you to identify your employers and might trigger a federal (and possibly a state) audit because the IRS will know that the family didn’t take care of their responsibilities as a household employer. This is why it’s best to work things out with your employer first.
Read tips from the IRS on what to do if you are missing a W-2.
5. Pay your share of taxes
If you have to file a Form 4852, you’ll still have to pay your share of federal and state income taxes for that year. That could be difficult for you to estimate, so if for some reason, you get your W-2 after filing Form 4852 and the numbers are different, you may have to file Form 1040-X to amend your income tax return. “It’s a tricky situation to be in, but you have to look out for yourself because reporting your income is the law,” says Tom Breedlove, Sr. Director of Care HomePay.
Taxes can be a sensitive subject, so it’s important to talk about them early on when you’re first interviewing for a job. Look for families who are open to paying legally and educate those who aren’t aware of what’s involved.
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* The information contained in this article is general in nature, may not be applicable to your specific circumstances, and is not intended to be a substitute for or relied upon as personalized tax or legal advice.