Earned Income Tax Credit Puts Nanny Employers in a Bind
You found a lovely caregiver, Mary, and mutually agreed that you would pay her $400 a week, under the table.
Why take taxes out of her meager income, you rationalize. She probably won't owe any income taxes anyway. And Mary is a single mom, supporting her own child on her income. And why should you do something that makes your childcare expense go up another 10%-20%?
The end of the year comes around and Mary gets to talking with her friends. Anna, another single mom who lives next door, tells her about the Earned Income Tax Credit. It sounds complicated, but basically the EIC lets low wage earning workers like Mary and Anna receive an income tax refund, even if they didn't owe or pay any income taxes. It is a 'refundable, negative income tax.' You need your W-2 form and you need to file a 1040 tax return. Anna got help at the free tax clinic at the library and is getting over $1500 back.
Mary comes to you and announces her change of heart. Can she please have a W-2 so she can file for the EIC also?
The Consequences
Well, Mary was paid $20K last year. The Social Security Taxes on that are $3K. You could have deducted Mary's share, but you weren't going to pay this tax. And then there are the state and federal unemployment taxes. Add on another $400 or so. But wait, the state needed filings every quarter so you are late - tack on another $150 in late fees and interest.
What are you to do? Mary is a fabulous nanny, you have developed a good working relationship in the last year. She will stay late when you need her to without complaining, and your children love her. And finding another nanny is such a chore, one you don't have time for. You agree to file the taxes and take out your checkbook.
The Moral
Don't wait until the end of the year to get unpleasant surprises like this. Start your relationship off on the right foot and begin deducting the taxes from the very beginning.
Do you wonder if you qualify for the Earned Income Tax Credit? The IRS has a quick qualification tool online at http://apps.irs.gov/app/eitc2005/Return_To_Start.do
Why take taxes out of her meager income, you rationalize. She probably won't owe any income taxes anyway. And Mary is a single mom, supporting her own child on her income. And why should you do something that makes your childcare expense go up another 10%-20%?
The end of the year comes around and Mary gets to talking with her friends. Anna, another single mom who lives next door, tells her about the Earned Income Tax Credit. It sounds complicated, but basically the EIC lets low wage earning workers like Mary and Anna receive an income tax refund, even if they didn't owe or pay any income taxes. It is a 'refundable, negative income tax.' You need your W-2 form and you need to file a 1040 tax return. Anna got help at the free tax clinic at the library and is getting over $1500 back.
Mary comes to you and announces her change of heart. Can she please have a W-2 so she can file for the EIC also?
The Consequences
Well, Mary was paid $20K last year. The Social Security Taxes on that are $3K. You could have deducted Mary's share, but you weren't going to pay this tax. And then there are the state and federal unemployment taxes. Add on another $400 or so. But wait, the state needed filings every quarter so you are late - tack on another $150 in late fees and interest.
What are you to do? Mary is a fabulous nanny, you have developed a good working relationship in the last year. She will stay late when you need her to without complaining, and your children love her. And finding another nanny is such a chore, one you don't have time for. You agree to file the taxes and take out your checkbook.
The Moral
Don't wait until the end of the year to get unpleasant surprises like this. Start your relationship off on the right foot and begin deducting the taxes from the very beginning.
Do you wonder if you qualify for the Earned Income Tax Credit? The IRS has a quick qualification tool online at http://apps.irs.gov/app/eitc2005/Return_To_Start.do
posted by Kathleen Webb at
3:48 PM
2 Comments:
Well, as an all-too-rare household employer who pays our nanny on the books, I'm all for encouraging every parent to pay their nanny's payroll taxes. (not to say enforcing the law!)
That said, there are three problems with this "Mary" scenario.
One: Mary, already working off the books, probably won't even file a tax return. Or if she does, she'll declare minimal income, way less than the $20K she's earning from you.
Two: the odds of an individual who already avoids the system ever applying for benefits from the system (whether unemployment or disability insurance, or a tax break) are extremely low. Our nanny, who was out recovering from surgery for 3 weeks (the first 2 of which we paid her half-salary), *refused* to apply for the disability insurance she was entitled to. Nannies -- even the ones who work on the books -- might have many reasons to avoid the system (visa status, years of not filing tax returns before working on the books, etc.). And
Three: Scare tactics (late fees! UI & DI taxes! SS & Medicare (times two!) -- all of which do indeed add up, as I know from experience) don't help solve this deplorable situation where the vast majority of household employers break the law and pay nannies off the books. Even Caitlin Flanagan's eloquent importuning (in The Atlantic, on the Today Show, anywhere she can be heard) has barely made an impact.
There's really no good way to convince people to do this. I've tried, and the universal response is "*They* don't want to work on the books." (*They* being the immigrant, brown-skinned women who deserve the same protections and benefits that we employers ourselves expect in the workplace.) Sorry to rant, but as a white man married to a black woman and now the parent to two biracial (read "black") children, I'm pretty sensitive to this problem. OK, enough for now...
"One: Mary, already working off the books, probably won't even file a tax return."
Mary will do what is in her economic best interest to do. At $20K a year in income with a dependent and head of household status, it is in her economic best interest TO file the tax return, as the benefits to her ($$$) far exceed the costs.
Post a Comment
<< Home