4 reasons why nannies and senior caregivers need to be paid legally

 

As a household worker caring for a family’s loved ones, you should view yourself as a professional — because you truly are one. And just like the rest of the professional working world, you should be paid legally, rather than under the table.

 

Yes, that means taxes are involved, but what you may not realize is that taxes provide you with several very important benefits and protections. Below are four short and long-term benefits you receive when the family you work for pays you "on the books”:

 

  1. A traceable employment history. This may not seem like a big deal, but there are several life situations where you’ll need to provide payroll documentation. Some examples are applying for a car loan, a mortgage, a student loan, a credit card, an apartment lease, health insurance or auto insurance. If your employment is not documented, it’s as if you don’t work and have income, which makes it difficult to be approved for any of these items.
     

  2. Unemployment insurance benefits. When paid legally, you are entitled to receive approximately 50% of your salary for up to six months if you lose your job due to no fault of your own. This benefit is free to you as your employer pays taxes toward the cost of the program.
     

  3. Social Security & Medicare credits. When you retire, you’ll receive money for living and medical expenses. How much you receive is based on several factors, including how much in Social Security and Medicare taxes your employers have sent to the IRS on your behalf during your working lifetime. According to the Urban Institute, the average American currently can expect to receive approximately $550,000 in Social Security and Medicare benefits after contributing roughly $362,000 in taxes over their working lifetime. That’s about  $1.50 in Social Security and Medicare benefits for every dollar in taxes they have withheld.

 

When paid as a professional, your employer matches the taxes they withheld from you on a dollar-for-dollar basis. That means every year you work under the table takes away from your potential retirement benefits. And if you’re never paid legally, there’s a chance you’ll never be able to stop working.

 

  1. Healthcare subsidies. As a requirement of the Affordable Care Act, you must have a health insurance policy. If you purchase an individual policy on the health insurance marketplace and are paid legally, you could qualify for a subsidy to lower the cost of your premiums. See how much you could save by using the Kaiser Family Foundation’s subsidy calculator.

 

How to think about legal pay when finding a job

Because everyone’s taxes are different — depending on where you live, how much you make, and other factors — jobs have to be posted in terms of gross wages (before taxes) instead of net pay (after taxes). However, most people need to know how much they can expect to put into their bank account each pay period. To make things easier on you, work backwards using a paycheck calculator to convert net pay into gross wages. Then you’ll know what rate of pay to ask for when you apply for different caregiving positions.

 

For example, say you need a net (take-home) pay of about $500 a week. Using Form W-4, you select Single with 2 allowances, use a paycheck calculator and determine you need to ask for a gross wage of $630 per week. Here’s what your paycheck looks like:

 

Gross Weekly Wage:

$630.00

Social Security & Medicare

($48.20)

Federal Income Tax

($51.78)

State Income Tax

($28.64)

Total Tax Withholdings

($128.62)

Net Pay

$501.38

With this pay structure, you meet your budget and are entitled to all benefits and protections under the law.

 

Two additional notes about being paid legally

  1. Even if you have been paid under the table, you still owe the federal and state income taxes when you file your personal income tax return. This is because the IRS requires you to pay taxes on any wages you earn throughout the year.
     

  2. If the family misclassifies you as an independent contractor by giving you a Form 1099, you would owe all the taxes listed above, plus an additional $48.20 per week (roughly $2,500 per year). The reason is due to the form requiring you to pay both the employee and employer portions of Social Security & Medicare taxes. You also would not be eligible for unemployment benefits because no unemployment insurance taxes were paid by the family while you worked for them.

 

Being paid on the books is not only the law, it also provides significant benefits which you as a professional deserve to have. So don’t think of it as a tax bill. Think of it as an investment in your financial future.

 

 

* The information contained in this article should not be used for any actual nanny relationship without the advice and guidance of a professional advisor who is familiar with all the relevant facts. The information contained herein is general in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for your specific circumstances and may require consideration of other matters.

 

101 Comments

Join the conversation

Comment
Placeholder image

Parveen A.

Hi There! I totally agree with paying out taxe's, they are lot's of benefit's in over all run of employment. You benefit social security,medicare, unemployment, applying for mortgage or buying a car etc. I totally agree and it's legal and that's how it should be. Thank's for your great advice. Parveen A.
August 18, 2015 at 8:37 PM
Photo of Darren F.

Darren F.

"Managed care"-state-federal agencies, profit or non...EXPLOITATIVE to seniors and caregivers. Get an accountant. LLC. Bond, Inc. yourself. Corps. have tons of rights that you as an individual taxpayer do not. Work smarter, not harder. (Sorry to the shirt tie and blouse crowd). Sure-pay taxes; but not at the expense of some company's additional "off your back" profit (10-15% ) over and above workers comp./fed/state, payroll service, insurance...top heavy middlemen. The other stuff about being "unprofessional" is horsefeathers...think about it, ask around and you will see what is" unproffesional". Best
May 27, 2015 at 1:06 PM
Placeholder image

Geraldine E.

I work 50 hr a week an get paid 1025.00 a week.
May 26, 2015 at 9:09 PM
Placeholder image

Natalie

I have a roommate who gets paid $500-700 a week. If his employer offers to pay him cash in hand without deducting any tax but he still submits a tax return at the end of the year, would this be illegal?
May 18, 2015 at 9:26 PM
Placeholder image

Danisia S.

This is unrelated to pay but how much info should you give out to perspective employers in lieu of all the identity theft problems going on? I don't know why but ts kinda scary to me.
April 29, 2015 at 1:49 AM
Photo of Tom B.

Tom B.

Hello Victoria. I'm sorry to hear you're just learning about the tax and payroll responsibilities your employer has. You're correct that it's a tough position to be in because you do have a responsibility as a citizen to declare your income and pay the appropriate taxes. But on the same hand, if the family you work is completely against going through the "nanny tax" process, the form you'll fill out to report your income essentially lets the IRS know that an audit should happen. At this point of the year, both you and the family will need to file for an extension on your personal income taxes if they decide to catch up on their taxes. We have a step-by-step approach on how to get all this done and I would highly recommend you show the article to the family to get the process started (https://www.care.com/homepay/last-minute-tax-tips-for-families-1403201632). And please let the family know that HomePay can do all this work for them. We help families in their situation all the time and can get this taken care of a lot faster than they can on their own.
April 06, 2015 at 12:34 PM
Placeholder image

Victoria

I've worked as a nanny for a family for about 8 months now. They never provided me with an W2 or any other paperwork and since this is my first real job I never really though about paperwork and such. I earn about $1600 per month. I recently asked my employer about whether I have to pay taxes, but we then found out that it's too late for her to give me a W2 form since the deadline for that is already passed. So should I declare my nanny income while filing my taxes or not? The family will probably get audited for it which I don't want to happen, but I also don't want to get in trouble for not declaring it.
March 27, 2015 at 4:33 PM
Placeholder image

Andria

Hi!! I need a serious help with something. I was hired by a liquor store owner when I got confirmation of my work permit. She hired me for $8.00 and I worked for 5 months. After receiving my EAD and SS, she still decided to pay me in cash. Now I left the job but I showed this experience for a position at a hospital for food service. She didn't fill out any W2 or W4 files for me and now I am stuck in a situation where I might be accused of lying if this info can't be pulled up during my background check. Please note that I am currently working legally and this is my second job. How can I come clear with this mess? How can I pay taxes for the income I earned for 5 months? Is that possible? Please help me out!!
March 23, 2015 at 9:30 PM
Photo of Tom B.

Tom B.

Hello Sean. We usually handle household employment payroll and tax questions here, but your question is common for this industry so it's important to discuss. If your employer tells you that they are covering your taxes and paying you in cash, you should be okay since you filled out a W-4 and income taxes are required to be withheld in just about every industry - except household employment. If you are skeptical that taxes are being withheld, you need to keep track of how much you are being paid in cash every week so if you never get a W-2, you'll have enough wage information to accurately fill out the appropriate tax forms.
March 18, 2015 at 3:32 PM
Placeholder image

sean

I work as a stockboy in a deli and filled out a w4. My employer told me that the hourly rate was 9 dollars but that he paid the taxes. Right now I am recieving cash payments weekly in a td bank envelope and I'm given a breakdown of the hours I Worked. When it comes time to file my w2 will I have to pay all the taxes that arent really being taken out of my check?? Is my employer lying to me by saying he "pays the taxes".
March 16, 2015 at 8:22 PM
Photo of Tom B.

Tom B.

Hello Logan. I'm very impressed by all the research you've done and your commitment to doing things the right way. You're right that because your nanny will be under 18, you won't have to worry about withholding Social Security & Medicare taxes from her or paying those taxes yourself. You also won't have to worry about unemployment insurance taxes. The income taxes should be withheld though and that will be based on how she fills out her federal W4 and state withholding form (if you live in a state with income taxes). Since she's 16, she may need some help with these forms and it's perfectly fine for you to assist her. Once you know her withholding allowances, you can use a payroll calculator to figure out how much in income taxes to withhold each pay period.
February 19, 2015 at 3:49 PM
Placeholder image

Logan

I am hiring a 16 yr old nanny to watch our kids. I think understand my tax responsibility as her employer. I had her fill out all the forms and everything. I'm really trying to do my best to do this all by the books. My question is about how much to withhold from her paycheck, and how much I will pay in employment taxes. She will earn $150/week. I believe because she is under 18 yrs old, I will pay nothing for her Social Security and Medicare tax, 6% for FUTA (and looking to receive the 5.4% credit back) and State unemployment tax estimated at less than 2%. As for her withholdings, I am unsure what percentages to work with for her. Because she is under 18 and will be claimed as a dependent by her parents and will make more than $6,200/year, I want to make sure I am not withholding too much in taxes. My other question is, does she need to pay Social Security, Medicare, and Federal income taxes based on those numbers?
February 18, 2015 at 5:22 PM
Photo of Tom B.

Tom B.

Hey Lielanilyn. The purpose of unemployment benefits is to help you financially until you find a new job. Once you've found a new job, whether taxes are reported or not, you should stop receiving unemployment benefits.
January 23, 2015 at 12:18 PM
Photo of Tom B.

Tom B.

Hey Monica. Great question! The $1,900 threshold is per employer, not the total wages the nanny earns so neither you nor the other family needs to worry about tax withholdings. You both can refund the FICA taxes you withheld from her. And unless you paid her $1,000 or more in a calendar quarter, you won't have to pay unemployment insurance taxes either. The nanny will take the total wages she earned from both you and the other family and record the total on Line 7 of her 1040 with the letters "HSH" to tell the IRS it was household employment income.
January 23, 2015 at 12:13 PM
Placeholder image

Lielanilyn

Hi, I'm currently receiving an unemployment benefits. If I receive a check without any tax taken, do I have to report this to the unemployment?
January 23, 2015 at 4:58 AM
Placeholder image

Monica

What if you work for more than one employer and for each you under the $1,900 threshold? Are you not subject to FICA tax? I hired a part time nanny and withheld all taxes (Soc Sec, Medicare, and income taxes) because we thought she would stay on long enough that it would be necessary. At the time she was working for another family with the same situation and we each paid her $1,100 for 2014. I know in total her wages exceed $1,900 for the year, but with each individual employer it did not exceed $1,900. If I reimburse her for the FICA I withheld (as I should), will she be subject to the FICA tax when she files or is she exempt?
January 22, 2015 at 10:07 PM
Photo of Tom B.

Tom B.

Hello Zadie. You're absolutely correct. When your employer withholds the appropriate taxes from you and pays their taxes, it allows you to access benefits like unemployment when you lose your job due to no fault of your own. For many caregivers, that benefit alone is worth is because you don't have to worry as much about how you'll pay the bills while you find a new job.
December 11, 2014 at 3:25 PM
Photo of Zadie S.

Zadie S.

Wow my head is now spinning from all this I have my Employers take and pay the apprioate tax medicaid and ss it is legal because that is what your country requires if for some reason I loose a job I am able to file for Unemployment and that is my insurance right there.
December 10, 2014 at 12:13 AM
Photo of Tom B.

Tom B.

Hey Lashey. I'm not sure if you're legally required to provide this information, but it would be nice of you to help your caregiver out. In terms of her pay, if she will earn $1,900 or more from you this year, you need to be withholding Social Security & Medicare taxes from her pay and complying with household employer payroll and tax requirements. A breakdown of these requirements can be found here (https://www.care.com/homepay/nanny-tax-forms-and-procedures-what-are-they-all-about-1106221319).
December 08, 2014 at 6:24 PM
Placeholder image

Lashey

I have a caregiver I hired by my own 2 weeks ago. She is trying to go to college and now wants a proof of employment & income letter. Do I have to provide this? We pay her weekly by check without deductions as she has to do that on her own taxes. What am I obligated to give her?
December 04, 2014 at 2:29 PM

Leave a comment

You can post a comment by logging in to your Care.com account or continue as a guest below.