Well, it’s that time of year. In addition to the extra taxes being taken out of my pay, the tax bills for the nanny have started rolling in.
Along with the tax management/payroll company bills.
And it ain’t cheap.
Yes, you heard that right. We pay our nanny “on the books” (unlike, it appears, 95% of other families in our neighborhood). I just had a conversation with a friend yesterday who is hiring a nanny… Under the table to eliminate tax headaches and reduce costs. And I get it. I really do.
We’re trying to do the right thing. Do it the legal way. Allow for the nanny to become eligible for social security, disability, and unemployment.
But it’s thankless. And expensive. And time-intensive.
And now I understand all those other families, smug as they smile and shake their heads at us, who choose an easier way.
- Nannies Prefer Under the Table Pay. At least in this area. I had a heck of a time finding, first of all, a nanny legal to work in the United States (interestingly, all the nannies recommended to us were not). Then upon broaching the topic of paying “on the books,” I was faced with blank stares, frowns, and requests to gross up the salary so that the take-home rate would be comparable to the cash market rate. Really?? Gross up?? I can only imagine how it would go over if I approached my boss and asked him to gross up my pay. Fortunately for us, we finally found a few nannies who were open to the idea <gasp> of being paid legally – and ended up hiring one of those.
- Nannies Compare Pay Rates. Funny how different this industry is from my own. It would extremely taboo for me to discuss my compensation with anyone, yet nannies appear to do it on a regular basis. And, you guessed it, the comparison is done in cash-only rates. So despite the fact that my nanny currently earns a salary complete with paid holidays, vacations, and days off whenever we choose to vacation, I get the distinct sense that she feels as if she is being under-compensated compared to her peers. And in fact, she is. Though her rate is actually higher than market, her take-home pay is lower – and that is what she is comparing. We have had the conversation a few times now about the benefits she is receiving for legal pay (in terms of social security, unemployment, etc.) yet I don’t feel that is something that is motivating nor attractive to her.
- Tax Process is Ridiculously Difficult. I like to think I am a reasonably intelligent person. Who can put in the time to do something right. But in the case of nanny taxes, it took a very short period of time before I realized that I simply did not have the background nor inclination to handle them. Every time I turn around there is a new tax form due!! In California alone, I am receiving a pile of paperwork each quarter to complete and return. I have heard stories of well-meaning taxpayers making one minor oversight or error, and it costing them thousands of dollars come audit time (vs. their under-the-table paying peers who are seemingly never found out). Which brings me to my next point.
- Nanny Tax/Payroll Company Must Be Hired. Okay, not an absolute must, but almost. Like I said, I couldn’t figure it out on my own. So now here’s another expense – the cost of the tax company, a cost for payroll, a cost for each filing, etc, etc. We use a wonderful company with outstanding service (Breedlove and Associates); they are the best out there and worth every penny. But still, an added expense from which my smug under-the-table nanny paying friends are exempt.
- Changes to Nanny Pay Can Raise Red Flags for IRS Audits. Or so says my CPA. After realizing that perhaps a blanket salary is not the best approach for our nanny (given a reduction in work hours and also realizing that I am not actually incenting her to work), we mentioned to our CPA that the expenditures will likely change for next year as we move to an hourly rate paid only for hours worked. The CPA said that is fine, but changes to nanny pay (and ultimately the elimination of nanny pay once the nanny is no longer needed) can raise the red flag for an audit. Wonderful. So my thanks for paying legally and on the books? A potential audit because we and the nanny agree to modify the pay structure.
- Workers Compensation Insurance. Required in certain states, including mine, when you hire a household employee (nanny). The good news here is I would have purchased this regardless; I think everyone should protect themselves and the people in their homes in this way. But – it is only required because we have opted to pay on the books.
- Overtime is Required. This is ultimately a good thing – it protects the nanny from being taken advantage of by families forcing her to work 50/60/70 hour weeks at the same hourly rate. But – it is hard to compete at market rate with this requirement. Example: market rate in this area is $15/hour cash (no overtime). That’s $750/week for a 50 hour week. For a family paying on the books, however, that translates to $825/week ($600 for $15 at 40 hours, plus an additional $225 for $22.50 overtime at 10 hours). And the best part? Even with the overtime, the nanny may still take home less net pay. Luckily for us, our schedules are such that we rarely even reach 40 hours. Let’s hope it stays that way.
- Nanny Pay is AFTER Tax for Employer. You heard that right. While every other small business is able to deduct wages off the top, families don’t receive a dime in deductions. We pay our nanny AFTER we have been taxed. And then are taxed AGAIN for her. A glaring issue that penalizes the smallest of small businesses – a working mother and father trying to raise a family. Oh and the childcare credit? Yeah, a grand total of up to $600 for the year. Gee whiz. Thanks.
- Nanny Misconceptions. Perhaps this is just our nanny, perhaps not. But she has mentioned offhandedly a few times how she realizes that paying her legally is actually cheaper for us. What?? I have, on a few occasions now, explained that it actually costs us quite a bit more. She politely nods… But I still sense that she thinks it is financially beneficial for us to pay her this way. And why wouldn’t she think that? She sees everyone else being paid under the table, a method which is preferred by her, so she figures there MUST be some logical reason we want to pay her this other way. And there is, right…?
- Potential New Legislation Requires Formal Breaks and Lunches. Fortunately this legislation has not passed yet, but it’s still on the docket. If passed, it would require families to literally relieve the nanny for formal 15-minute breaks and a 1-hour lunch. That would be all fine and good if, well, parents were available to provide that relief. In which case, they probably wouldn’t need a nanny at all! So what happens if this passes? I think it encourages even more under-the-table and unregulated nanny employment vs. more compliance. What parent is able to drive home at least three times a day, relieve the nanny for a break or lunch, and then drive back to work?? I’ll tell you – none. So good luck with that legislation right there.
- Fees for Compliance Increase Over Time. I was recently on the phone with our nanny tax advisors, asking them how I would enact a change to our nanny’s pay structure. As part of the conversation, I also asked what parents do if they have more children and then take maternity/paternity leaves from their jobs (e.g. eliminating the need for a nanny during that period of time). I was told that typically these nannies are terminated and then, if needed and still available after the leaves are done, they are rehired. The representative pointed out that one of the benefits of paying legally can come to fruition during this time of leave: the nanny could collect unemployment. But, he pointed out, by collecting unemployment, it meant one of my something-or-other fees/taxes would increase – potentially up to an additional 9%. 9%! I asked what would happen if the nanny didn’t file for unemployment during that time?? And he replied that in California, the rate will go up regardless in a few years (cannot remember offhand what it was – I want to say it was somewhere around the 3 year mark). So my takeaway was, figure out an alternative childcare solution before that clock is up!
Oh and before you tell me that the nanny is an independent contractor who I can 1099, let me tell you that she is not. Nannies have been clearly defined as W2 employees and must be treated and paid as such. There is really no out.
So to those who also pay on the books, despite the challenges, I have a new respect for you. And for those who pay off – well, I get it.
We’re going to continue doing it the “right” way but are pleading for tax changes to simplify and perhaps even incent the process. Until that happens, I doubt that we will ever see majority compliance.