Being Paid "On the Books" Pays Off
Why nannies, babysitters, senior care workers, housekeepers and other types of caregivers need to be paid legally.
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:
- 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.
- 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.
- 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!
- 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.
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)|
With this pay structure, Mary is entitled to all benefits and protections under the law.
- 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.
- 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.