While paying nannies legally has become more the “norm” in recent years, some families still don’t understand the benefits to both them and their nanny from paying “on the books.” If you are a nanny and you come across a family that does not want to pay taxes for employing a nanny, ask us for help in explaining to the family that it is truly in their best interest to pay you properly and legally. Some of the following reasons may also help:
- There are two main tax breaks that can offset your employer’s tax costs. By legally employing someone in their home (paying “on the books”), they will be able to take advantage of one of the two following tax breaks:
- Dependent Care Assistance Program (DCAP) – Most companies provide this benefit and allow employees to contribute up to $5000 of pre-tax earnings to a Dependent Care account. They would then be reimbursed these tax-free funds to cover childcare expenses.
- Child and Dependent Care Tax Credit – For those who don’t have access to a Dependent Care Account, they can claim the Child and Dependent Care Tax Credit (Form 2441) on their personal income tax return at year-end. They can claim up to $3,000 of the un-reimbursed qualifying child care expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals. The credit can be anywhere from 20% to 35% of their qualifying expenses.
- Your employer has to report your wages and the taxes they withheld for you on their personal income tax return. The IRS figures to catch a lot of people who forget to tell them about their nannies.
- You can receive workers’ compensation, which in turn protects your employer if you get hurt on the job.
- You will be eligible for Social Security and Medicare benefits, as well as unemployment insurance.
- You will have a legal employment history, which is necessary to obtain a mortgage, car loan, or credit card.
- Because it’s the law!
But it’s not only in the family’s best interest to pay legally – it benefits the nanny as well. Here’s how:
1. Verifiable income
If a nanny applies for a car loan, student loan, mortgage or even a credit card, they’ll need to show that they can pay monthly installments. Being paid legally provides a verifiable income to show the lending institution. If their pay is not documented, they have no way to show that they have a job that brings in a steady income.
2. Legal employment history
Having a work history is also important when applying for a loan, credit, or their next job. Being paid “on the books” creates a legal employment history that banks and lending institutions as well as future employers can verify.
3. Unemployment benefits
Employers paying workers legally are required to pay unemployment taxes. This is an employer-only tax, yet it’s the employee who benefits. If the nanny loses her job, through no fault of her own, unemployment benefits will partially replace their lost wages for up to six weeks while they look for a new job. Amicable splits are common in household employment and this is a benefit a nanny will want if they find themselves without a job.
4. Social Security and Medicare benefits
Social Security and Medicare taxes will be taken out of a nanny’s pay. This money is set aside to help pay for their living and medical expenses when they retire. An employer also pays into their Social Security and Medicare. If the nanny is paid “under the table,” they won’t receive these benefits. As a result, they may need to continue working past retirement age.
5. Health care subsidy
Under the Affordable Care Act (ACA), a health insurance marketplace has been created to help uninsured people find coverage. If your nanny wants to purchase a policy through the marketplace, they could qualify for a subsidy and cut the costs of their insurance. Of course, this is only available to them if they are paid legally.
6. Employment benefits
Providing benefits to a nanny helps retain the best employees. A 401k retirement plan and health insurance plans that may be cheaper and provide better coverage than the ACA marketplace are a couple of perks that would set a family apart from other employers. But the nanny will be need to paid legally in order to take advantage of these benefits.
The benefits and protections of being paid legally far outweigh the small amount of money that will be taken out of their pay each week.
Need to point your employer in the right direction to pay you legally? Our partner GTM Payroll Services works with hundreds of families, nannies, and agencies around the country, helping them sort out taxes and comply with the nanny tax laws of the IRS and their state. This helps ensure a healthy working relationship between the family and their nanny.
For more information, please contact us today at (518) 348-0400.