Paying Nanny Under the Table - Potentially an Expensive Experience

Many families - 70 - 80% according to IRS estimates - choose to pay their nanny under the table. This 'saves' the family the approximately 10% premium on employment taxes, and maximizes the nanny's take home since she does not make the Social Security, Medicare, and income tax contributions that other US wage earners do.

Sounds like these families have found a money saving proposition, right? The true answer is maybe, and maybe not!

Nanny positions are, by their nature, not permanent positions. The children will grow, move on to preschool, kindergarten, elementary school. The family's child care needs change dramatically from full time, to part time, to after school or before school only. The full time nanny typically will have to move on after a few years, as they cannot live on the reduced income.

Nanny positions do not always end pleasantly - a family that suffers a job loss, for example, may dismiss the nanny without notice because they don't have the current income to support the nanny. Nanny may not live up to the family's standards and be similarly dismissed without notice or severance. Our 15 years of experience indicates that nanny job loss almost inevitably results in a trip to the local unemployment office and an application for benefits to tide the nanny over until the next job - irrespective of whether taxes were paid or not! Guess what? Nanny can receive these benefits even when you didn't report her income.

The Los Angeles Daily News recently interviewed accountants and tax experts and came to the same conclusion. California accountant Eva Rosenberg shared the experience of a client who fired their nanny, only to have the nanny file for unemployment benefits. The state assessed the family back taxes, penalties, interest and reported the family to the IRS.

"Since no payroll tax returns had ever been filed, there is no statute of limitations," Rosenberg said. "They can go back forever. It could be nasty."

Parents commonly cite two overriding reasons for their tax evasion - the expense and the paperwork.

Many parents do not realize that the expense can be offset - often entirely - by available tax incentives. A dependent care account, funded to the maximum $5000 annually, can reduce a family's tax burden by $2000 or more - offsetting the employment taxes on the first $20K they pay the nanny annually! If a dependent care account is not offered by one of the parent's employers, they can look to the Child Care Credit and a possible $1200 tax break. These tax incentives are not available to families who pay their nanny under the table!

There are solutions for the nanny tax paperwork readily available. For about $1 a day, families can outsource their nanny tax compliance paperwork to a firm like HomeWork Solutions Inc., a national nanny tax services company offering their services to families for 15 years. Full payroll and tax compliance services are as little as $2 per day! Peace of mind does not come with an expensive price tag!

Do you want to learn more about nanny tax compliance and 'getting right' with the IRS? Call 1-800-NaniTax (626.4829) and talk to Marcia or one of our other nanny tax specialists. They will be happy to walk you through your options and get you started down the road to nanny tax compliance.

Considering Getting Right with the IRS?

Millions of Americans prepare and submit their annual income tax returns to the IRS in the weeks leading up to April 15 - AKA "Tax Day." Several hundred thousand taxpayers owe "nanny taxes", the employment taxes associated with their employment of a nanny, housekeeper, or regular babysitter. The IRS estimates that 800,000 or so of these otherwise law abiding citizens will fail to report these wages and pay these taxes.

2008 is a bit different, because for the first time we have $300 - $1200 tax refunds available to these household workers IF they file an income tax return. The college student who nannied over the summer and earned $4000 will quickly realize that the tax refund exceeds their liability and will actually WANT to file the tax return. Ditto for the $75 a week housekeeper. Free money anyone?

Families can avoid IRS penalty and interest charges, as well as enjoy preferred FUTA rates if they report and pay these taxes on or before April 15.

Nannies and other domestics who want to "get right" with the IRS have several options when the family fails to provide a W-2 form. Each of these options results in the family entering into a pen pal relationship with the IRS, and the eventual payment by the family of the back taxes, penalties and interest charges. It is not a pleasant position for the family to be in.

Families are encouraged to contact HomeWork Solutions to discuss their situation and available options with a client service representative.

Nanny Tax Evasion: Sentencing

Richard Josephberg, the former NY investment banker, was sentenced to 50 months in Federal prison for nearly 3 decades of tax evasion, including the first ever conviction for failure to pay the so-called "nanny taxes", the payroll taxes associated with the wages he paid his nanny and housekeeper. (See earlier posting)

Nanny Tax Evasion Conviction

A former Armonk, NY investment banker, Richard Josephberg, was convicted of 21 counts of tax evasion on April 19, 2007, including an "Nanny Tax" evasion count alleging that Josephberg paid his housekeeper and nanny in cash to avoid filing the required tax reports and paying Social Security and Medicare taxes for them. Sentencing is scheduled for July 19, 2007.

US Attorney's Press Release.

IRS Enforcement Initiative - Employment Tax Non-Compliance

Employment tax non-compliance issues and enforcement are part of an IRS agency-wide strategy to reduce the "tax gap", according to John Tuzynski, IRS Chief of Employment Tax Operations. Mr. Tuzynski made his remarks at the American Payroll Association's conference March 23.

Among several identified non-compliance issues identified, two are often associated with household employment. They are:

• Non-payment of employment taxes following cash payments to employees


• abuses in worker classification, especially treating employees as independent contractors, consequently failing to withhold and remit employment taxes

Mr. Tuzynski also discussed IRS efforts to implement and expand information sharing arrangements with state workforce offices. These offices are responsible for the management of unemployment insurance programs.