In a Tough Economy, Families Ignore the Nanny Tax at their Peril
Internal Revenue Service data for the period 1996 - 2006 indicate that nanny tax filings had dropped 26%. With total nanny tax filings of 225,441 in 2006 and an estimated 1.2 million nannies, voluntary nanny tax compliance is in the 20% range. According to a Wall Street Journal report, "growth in online hiring, and the casual, cost-averse attitudes of parents who find their nannies on the Web" are the primary causes for the poor compliance figures.
In a tough economy, nannies often find their jobs disappear when one of the parents looses their job or faces a significant drop in income. These nannies were happy to be paid "under the table" in cash when times were good. However, faced with a difficult job market, many of these same nannies will find their way to the unemployment office to file for benefits to tide them over between jobs.
This is when the laws of unintended consequences come into play.
The financial risk to the family in these cases is significant. The family has the obligation for remittance of the payroll taxes, not the nanny. A nanny who was being paid $400 cash has little or no income tax obligation on her wage - her risks for coming forward are nominal, and insignificant in the face of her lost earnings and need for unemployment benefits. The family, however, has approximately a $3700 back tax bill for just one year - and that is before penalties, interest, and the cost for professional assistance amending previously filed income tax returns. Consider for a minute that in metro areas the nanny cash wage is often $500 - $600 a week or more and the liability grows substantially.
There is no statue of limitations on payroll taxes - two or three years of back nanny taxes can quickly add up to the price of a small car.
It is true that nanny tax avoidance is the norm. The IRS has made no effort to enforce this tax in the last decade. A bad economy and the suddenly unemployed nanny, however, will bring the whole house of cards down quickly. Is this a risk that you are comfortable with?
More information about the risks of nanny tax avoidance can be found in 4nannytaxes.com's FAQ.
In a tough economy, nannies often find their jobs disappear when one of the parents looses their job or faces a significant drop in income. These nannies were happy to be paid "under the table" in cash when times were good. However, faced with a difficult job market, many of these same nannies will find their way to the unemployment office to file for benefits to tide them over between jobs.
This is when the laws of unintended consequences come into play.
The financial risk to the family in these cases is significant. The family has the obligation for remittance of the payroll taxes, not the nanny. A nanny who was being paid $400 cash has little or no income tax obligation on her wage - her risks for coming forward are nominal, and insignificant in the face of her lost earnings and need for unemployment benefits. The family, however, has approximately a $3700 back tax bill for just one year - and that is before penalties, interest, and the cost for professional assistance amending previously filed income tax returns. Consider for a minute that in metro areas the nanny cash wage is often $500 - $600 a week or more and the liability grows substantially.
There is no statue of limitations on payroll taxes - two or three years of back nanny taxes can quickly add up to the price of a small car.
It is true that nanny tax avoidance is the norm. The IRS has made no effort to enforce this tax in the last decade. A bad economy and the suddenly unemployed nanny, however, will bring the whole house of cards down quickly. Is this a risk that you are comfortable with?
More information about the risks of nanny tax avoidance can be found in 4nannytaxes.com's FAQ.
Labels: nanny tax avoidance, nanny tax compliance, risks of nanny tax avoidance
posted by Kathleen Webb at
10:05 AM
2 Comments:
I was JUST reading this WSJ article about 5 minutes ago and making comments to send off!
Thanks for posting this, Kathy.
Great article! I just added a link to this post from a related post that I posted last June to our elder care website at A Servant's Heart Senior Care. The issues are similar for privately hired eldercare workers to those for nannies.
- Tim Colling
A Servant's Heart Senior Care
A Servant's Heart Senior Care
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