The Benefits of Paying Your Nanny Legally

Dec 20, 2013 | Hiring an Employee, Household Payroll & Taxes, Tax & Wage Laws

paying your nanny legallyGTM Payroll Services estimates that there are more than two million household employees in the United States today. However, recent data compiled by the IRS show a startling number of household employers in noncompliance—whether or not intentional—with paying payroll taxes. The IRS is increasing its monitoring activities to ensure household employees are accurately being paid in accordance with federal guidelines.  As a result, by not being in compliance, any household employer faces a higher risk of significant fines, penalties, and interest charges. Following proper legal procedures for paying a nanny is not only beneficial to the family, it is crucial for the nanny as well. Review the list of benefits of paying your nanny legally below, and contact us with any questions you might have.

You are Eligible for Tax Breaks:
There are two main tax breaks that can offset your employer tax costs. If you are legally employing someone in your home (paying “on the books”), you will be able to take advantage of one of the two tax breaks:

  • Dependent Care Assistance Program (DCAP) – Most companies provide this benefit and allow employees to contribute up to $5000 of pre-tax earnings to a Dependent Care account. You would then be reimbursed these tax-free funds to cover childcare expenses.
  • Child and Dependent Care Tax Credit – For those who don’t have access to a Dependent Care Account, you can claim the Child and Dependent Care Tax Credit (Form 2441) on your personal income tax return at year-end. You can claim up to $3,000 of the un-reimbursed qualifying child care expenses paid in a year for one qualifying individual, or $6,000 for two or more qualifying individuals. The credit can be anywhere from 20% to 35% of your qualifying expenses.

You Avoid Tax Liability and Penalties:
Paying your nanny illegally can result in heavy tax penalties and even charges of perjury or tax evasion. With tax penalties comes the interest as well. Paying your employee under the table or off the books is extremely risky. Red flags can be raised if your nanny tries to file an unemployment claim or submit income taxes without a W-2. Form 1040 asks for all federal household employment taxes to be reported to the IRS – save yourself the possibility of fines by making sure you are legal at the start.

Benefits for Your Nanny:

  • A legal employment history which is necessary for them to obtain a mortgage, car loan, or credit card.
  • Eligibility for Social Security and Medicare benefits as well as unemployment insurance.
  • They can receive workers’ compensation, which in turn protects you if they get hurt on the job.

You Can Recruit and Retain Better Employees:
Because they recognize the benefits, many nannies and other household employees are searching for jobs with employers who pay on the books. Employers who choose not to follow proper legal procedures may end up losing out on quality employees.

Peace of Mind:
You’ll sleep better at night knowing you are following the law, allowing you to spend more time with your loved ones instead of worrying about the IRS looking over your shoulder.

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