Being Paid "On the Books" Pays Off

 

As a household worker, you should view yourself - and demand to be treated - as a professional. Part of being a professional is being paid legally rather than under the table. Yes, there are taxes, but the taxes provide you with several very important benefits and protections.


Why Being Legal is Being Smart

Below are some of the benefits and protections youll receive if youre paid "on the books" as a professional:

  1. Employment History. Being legal creates an employment history that is critical to daily life. An employment history is required for a car loan, a mortgage, a student loan, a credit card application, a health insurance application, an auto insurance application, future job applications, etc. If your employment is not documented, it is as if you do not work.
     
  2. Unemployment Insurance. 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 Benefits. When you retire, youll receive money for living and medical expenses. How much you receive is based on how much is paid into your Social Security account. When paid as a professional, your employer matches your retirement contributions on a dollar-for-dollar basis. Those paid illegally dont get any retirement benefits, which means theyll never be able to stop working.


    A Real Life Example: Barb earns approximately $30,000 per year. During her entire career she contributes about $40,000 to Social Security. During retirement, she will receive approximately $175,000 in Social Security benefits, assuming she lives until age 85. Because of the matching contributions from her employer and interest shes able to collect almost 5 times as much as she put in during her working years!
     

  4. Healthcare Subsidies. As a requirement of the Affordable Care Act, you must have a health insurance policy or pay a fine. 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.


Negotiating Compensation

Professionals negotiate their compensation based on gross wages (before taxes) rather than "net pay" (after taxes). Heres an example:

Mary has determined that she needs a net (take-home) pay of about $500 a week. Using Form W-4, she assesses herself as Single with 2 allowances and uses our Employee Paycheck Calculator to convert her Net Pay into Gross Wages. Mary asks for a gross wage of $630 per week. Her paycheck looks like this:

Gross Weekly Wage:$630
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, Mary is entitled to all benefits and protections under the law. 

Important Notes:

  1. If Mary had been paid in cash (off the books), she would still owe the state and federal income tax, but she would not be entitled to unemployment or retirement benefits because her employer did not report her wages or pay any employer taxes.
     
  2. If Mary had been paid as an independent contractor (Form 1099), she would owe all the taxes listed above plus an additional $48.20 per week (roughly $2,500 per year) because independent contractors have to pay both the employee and employer portions of the Social Security & Medicare taxes.

Being legal is not only the law, it also provides significant benefits which you as a professional richly deserve. So dont 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

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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
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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
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Geraldine E.

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

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