Nannies and other household employees hold jobs like any other professional and should be paid legally to gain important protections and advantages. You will need to pay taxes but the benefits will far outweigh the small amount taken out of your paycheck.
Here are some of the protections and benefits of being paid “on the books.”
1. You have a verifiable income
If you apply for a car loan, student loan, mortgage, or even a credit card, you’ll need to show that you can pay monthly installments. Being paid legally provides that. If your pay is not documented, you have no way to show that you have income.
2. You have a legal employment history
Getting paid “on the books” creates a work history. This is also important when applying for a loan, credit, or your next job.
3. You can receive unemployment benefits
When paying legally, employers are required to remit federal and state unemployment insurance taxes. If you lose your job, through no fault of your own, unemployment benefits will partially replace your lost wages for up to six weeks while you look for a new job. During this pandemic, nannies and other household employees are realizing the importance of legal pay and receiving unemployment benefits. Illegally paid workers who lost their jobs were left without a financial safety net at a time when they needed it the most.
4. You are eligible for paid sick leave
Many states and cities have enacted paid sick and family leave laws that include household employees. When paid legally, you and/or your employer may need to contribute a small amount each pay period for paid leave that is then available to you for specified reasons. To help workers during the COVID-19 pandemic, the federal government passed the Families First Coronavirus Response Act, which provides two weeks of paid leave if you get sick and additional time if you needed to care for someone who is ill.
5. You can enjoy Social Security and Medicare benefits
You and your employer will pay Social Security and Medicare taxes. This money is set aside to help pay for living and medical expenses when you retire. If you are paid “under the table,” you don’t receive these benefits and may need to continue working past retirement age.
6. You may be eligible for a health care subsidy
The Affordable Care Act requires everyone to have health insurance or pay a fine. A health insurance marketplace has also been created to help people find coverage. If you buy a policy through this marketplace, you could qualify for a subsidy and cut the costs of your insurance. Provided, of course, you are being paid legally.
Understanding gross v. net pay
An important distinction for household employees to understand is gross vs. net pay. Gross pay is your compensation before taxes. Net pay is your pay after taxes. Before negotiating an hourly rate or annual salary, know how much you need to “take-home” (your net pay). From there, you can “gross-up” your request. For example, Sara lives in Texas and needs a net pay of $600 a week. She can use this nanny tax calculator to insert her net pay and calculate her gross pay, which will be $741.
|Weekly Gross Pay||
|Federal Income Tax||
|Social Security & Medicare||
|Sara’s Net (Take Home) Pay||
If paid “under the table”
Sara would still owe income tax. However, she would not be eligible for unemployment or retirement benefits as her wages are undocumented and the family did not pay the appropriate taxes.
If illegally paid as an independent contractor (Form 1099)
Sara pays income tax and, as an independent contractor, both the employer and employee portions of the Social Security and Medicare taxes (an extra $57).
GTM Payroll Services relieves the administrative hassles of household payroll for household employers by providing a one-stop-shop for payroll, tax filings, compliance, and insurance. No risk. No hassles. No worries. If you or your employer have any questions about household employment, contact us at (800) 929-9213 for a free, no-obligation consultation.