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The Risks of Paying Your Nanny Under the Table

Evading taxes is never a good idea and the “nanny tax” is no exception.  Below are some considerations for families who choose not to pay their nanny legally:


-Nannies who are laid off may file for unemployment benefits.  If the employer did not establish a state account to report the employee’s earnings and pay unemployment taxes, state tax regulators will contact the employer regarding their former employee’s unemployment claim.  The employer may be subject to penalties and interest in addition to the retroactive taxes.


-Domestic employers may not be able to obtain workers’ compensation insurance without a federal employer identification number (EIN) and/or state employer tax accounts.  Failure to obtain workers’ compensation coverage may put the employer at risk of violating state law mandating that the employer have coverage, and the employer could face penalties and fees.  Additionally, if a household employee is injured on the job, the employer could be liable for lost wages and/or medical expenses (in addition to the penalties and fees for not obtaining coverage if required by the state).


-Nannies who do not have taxes withheld may choose to report their earnings on their individual tax return.  This can be especially problematic for the employer if the employee did not understand that no taxes were paid in and faces a hefty tax liability at the end of the year and becomes disgruntled.  An employer with an employee who reports earnings that were not properly documented may be at a higher risk of being audited by the IRS.


-A domestic employee may also “blow the whistle” on their employer for not properly handling their wages.  This scenario could unfold any number of ways, but the most common is when an employee attempts to take out a loan, rent an apartment, or make a large purchase and does not have the proper payroll documentation to verify their earnings/employment.  A disgruntled employee may also contact state tax agencies to report the employer for not reporting the earnings and paying taxes.


-Certain employers may face professional consequences for not properly reporting their employee’s earnings and paying the taxes.  Government appointees and judges regularly find themselves in the news and face severe consequences and public ridicule for not remitting payroll taxes.  It is not just public servants who should be concerned about paying the “nanny tax.”  Lawyers, financial advisors, certified public accountants, doctors, dentists, and other professionals who are licensed and/or work in a field that demands integrity may put themselves at risk if they choose to pay their employee under the table.


Unfortunately for employers, the tax requirements and wage reporting are often interconnected and an issue with one tax agency often leads to problems with other tax agencies and/or workers’ compensation insurance. 


If a family opts to pay their employee “on the books” for professional reasons, as protection should their employment arrangement turn unpleasant, or simply because they want to follow the law, they are ensuring that no matter what happens, they can have the peace of mind that they did things properly and will avoid the potential risks above and the associated aggravation and potential expenses.


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