When you’re interviewing a nanny, senior caregiver or any other household employee, the topic of pay will inevitably come up. When that time comes, a tip to keep in mind is that pay should always be negotiated in terms of gross wages – the amount a caregiver earns before taxes are deducted. You may have heard other families or caregivers talk about negotiating pay based on what the caregiver takes home (net pay), but that route isn’t ideal for a number of reasons.
“Think about the job you have – when you accepted the position, you didn’t talk to your manager or HR representative about the amount of money you’d take home,” says Tom Breedlove, Sr. Director of Care.com HomePay. “That’s because in the eyes of the IRS and the tax agencies in your state, the amount of money you earn before taxes is your actual pay – not after taxes are deducted.”
If you find yourself in a position where a caregiver you really like is pushing for negotiating pay on a net, take-home basis, here are five ways you can explain to them why it’s not in your’s and their best interest:
1) Payroll and taxes must be reported to the IRS and the state in terms of gross wages
Taxes are withheld from an employee’s gross wages to determine their net pay. For most caregivers, these are:
Social Security tax – 6.2% of gross wages.
Medicare tax – 1.45% of gross wages.
Federal income taxes – determined by how your caregiver fills out their Form W-4.
State income taxes – determined by how your caregiver fills out their state withholding form (assuming you live in a state with income taxes).
Gross wages also determine the amount of household employer taxes you must pay and are used by federal and state government agencies to set wage thresholds and wage caps for those various taxes.
2) If you negotiate a certain net pay, changes to the number of hours your caregiver works can cause under-payment
If your employee’s hours fluctuate, their gross pay needs to constantly be readjusted to maintain the same net pay. This means their hourly and overtime rates change constantly and could drop below federal or state minimum wage, depending on the number of hours your employee works. As a rule of thumb, your employee’s gross pay should never decrease unless they are being demoted or their duties change.
3) Federal and state income tax rates change frequently
Income tax withholding tables at the federal and state level change almost every year. This does not affect your caregiver’s gross wages, but for you to maintain their net pay, an increase or decrease in gross pay has to occur. Again, your caregiver’s gross pay should never decrease unless their duties are changing.
4) An employee that is single may cost more to hire than an employee that is married
When employees fill out their W-4, they claim deductions which tell their employer how much federal income tax to withhold from their pay. A single person with no children will have more income taxes withheld than a married person with children. This means that if both employees have the same net pay, the single person actually makes more money (and costs more to employ) than the married person when calculating each employee’s true gross wages. An employee’s personal life situation or choices should not impact your care budget.
5) Gross pay shows the true market value of the position
You’ve just read that when two employees have the same gross pay, they can end up with completely different take-home pays depending on the amount of deductions they claim on their W-4. You’re paying both employees the same, but the IRS and state determine that each employee must pay a different amount of income taxes throughout the year. This factor doesn’t diminish the value of the work that each employee performs, but one employee looks underpaid compared to the other if you’ve started with a net pay amount and “gross up” to account for taxes.
If you currently pay your household employee on a net basis, visit our paycheck calculator to translate it into gross wages. If you get stuck, call us for a free consultation. We’ll be happy to help so you can accurately track payroll and taxes going forward.