What to Do If Your Employer Won't Pay Taxes
If you're a nanny, babysitter or other type of caregiver, find out what to if your family won't pay you legally.
As a caregiver, you know you’re considered a household employee, not an independent contractor, so when your new family tells you they’d rather not pay taxes, you’re a taken aback. In this wink-wink situation, many families think they’re helping out their nanny by letting her bring home a little extra money, and they don’t even realize it’s illegal to do so.
“Tax season is a common time for household employees to have the ‘nanny tax’ conversation with their employer,” says Stephanie Breedlove, VP of Care.com HomePay. “In reality, the best time to approach this topic is before you are hired, or as soon as you discover you should be having taxes withheld.”
"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 just isn’t interested in paying taxes? What's your next step?
Have a 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 Weinberger, a lawyer and founder of Mom, Esq. “I always advise clients to be matter of fact and to avoid placing blame or becoming too emotional.”
If you don’t say anything, your employer might assume you’re okay 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 cash and you want to get on the right track. Many families want to do the right thing; they just don’t always know how.
Explain the Harm
Your employer might think it’s helpful to pay you under the table. If your paycheck is bigger and they don’t have to deal with paying household employer taxes, where’s the harm? But you know it’s illegal and you’re actually losing out on benefits like earning Social Security and Medicare when you retire, not to mention needing a traceable earnings history for loan applications. “I typically suggest that employees cite to the law, and ask for what it is that they are entitled to,” says Weinberger.
You can even share these 7 Reasons NOT to Get Paid in Cash.
Show Them What to Do
If you have a talk and are prepared with what needs to be done, your employer might understand the process isn’t too hard. Refer to How to Start Paying Your Caregiver Over the Table to find out what forms need to be filed and when to get help.
Even if you’ve been paid under the table for a while, the problem is fixable. If you’re 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.
File the Right Form
If your employer is against paying taxes, protect yourself by filing a Form 4852, a substitute form for a Form W-2 wage and tax statement. Because you’re required to report any income earned, this form offers you legal protection from charges of tax evasion.
Unfortunately, the form requires you to identify your employers and might trigger a federal and possibly a state audit, as it becomes clear that taxes were not paid. This is why it's best to work things out with your employers first.
Read the tips from the IRS on what to do if you are missing a W-2.
Fulfill Your Responsibilities
If you file a Form 4852, you'll still have to pay your share of federal and state income taxes for that year, and you could strain your employee/employer relationship.
“It’s a tricky situation to be in, but you have to look out for yourself because reporting your income is the law,” says Breedlove. And if that means moving on to a new job, you might have to do that too.
Filing taxes is essential because you begin to develop a good rapport with the government, one that shows you're following the law. If for some reason, you get your W-2 after filing the Form 4852 and the numbers are different, you’ll need to file Form 1040X, an amended U.S. individual income tax return.
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.
Julia Quinn-Szcesuil is an award-winning freelance writer and a mom to two girls. She lives in Massachusetts and has written for local and national publications.
Your Next Steps:
* The information contained in this article should not be used for any actual caregiver 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.
For more tips and advice, check out these Nanny Tax Articles.