What Can Happen if You Don’t Pay Nanny Taxes

Dec 30, 2019 | Household Payroll & Taxes, Tax & Wage Laws

Don't pay nanny taxes? Expect tears when caught.

If you don’t pay nanny taxes, you could wind up paying more in fines and penalties than your actual tax obligation.

Not paying your nanny taxes may seem like an easy way to save some money and not have to deal with the hassles of calculating and remitting taxes. Plus, if you don’t pay nanny taxes, how is anyone going to find out? Your nanny is on board as she gets a few extra dollars in her paycheck. You’re not running for political office or being nominated for a position in government. And those are only the people who get caught not paying nanny taxes, right?

Wrong.

There are a number of ways to easily get caught if you don’t pay nanny taxes. Most will end up with you paying much more in fines and penalties than in the actual tax responsibility you chose to ignore.

Fined for not paying unemployment taxes

Your kids are now in school so you don’t need a full-time caregiver or maybe it’s not working out with your nanny. However it happens, you and your employee part ways through no fault of your nanny. She files for unemployment to help with her bills while she looks for a new job. But she’s denied benefits as there is no record of her holding a job or even your family being an employer. Since you don’t pay nanny taxes, including unemployment taxes, you can expect a call from your state with failure-to-pay and failure-to-file penalties, which can add up to 50 percent of the tax due. That’s on top of the unemployment taxes you neglected to pay while employing your nanny.

Penalized for not having workers’ compensation

There a number of ways your nanny can get injured on the job. She may go see a doctor or visit the hospital emergency room. When recounting the incident to the doctor, she mentions that it happened while she was working. That opens up a workers’ compensation claim. If you live in one of the many states that require household employers to carry workers’ compensation, you can expect to be contacted by your state’s workers’ compensation board.

What can you expect in fines and penalties for not having proper coverage? In New York State, for example, paying workers “off the books” is considered “misrepresentation.” You could face a fine of $2,000 per every 10-day period of noncompliance. Additionally, the fine for a criminal conviction is from $1,000 to $50,000.

Contacted by IRS for failing to provide a W-2

Household employees enjoy many benefits when they’re paid legally. They have verifiable incomes and work histories when applying for credit or loans. They’re contributing to their Social Security and Medicare accounts for when they’re older and not working.

None of this happens if you don’t pay nanny taxes. Your nanny sees other nannies and friends working traditional jobs enjoying these benefits. Now they want in. They want you to withhold taxes and treat them like an employee. However, you refuse.

If your nanny doesn’t receive a W-2 by mid-February, they can contact the IRS and provide your information along with their dates of employment and estimated wages earned. The IRS will follow up with you about the missing W-2. Not only do you need to pay back taxes, but the IRS is also authorized to penalize you up to 100 percent of the tax you owe.

Increased risk of an audit

If you don’t pay nanny taxes and get caught, your chances of being audited have significantly increased. Even if you have nothing else to hide, an audit can be a huge hassle that sucks up your valuable time.

Denied job promotion or new career opportunity

While political appointees grab headlines when failing to pay nanny taxes, noncompliance can derail any number of job opportunities. Are you being considered for partner at your firm? Are you applying for a C-level opening at a major corporation? As part of the vetting process, you can be asked about paying proper taxes including for household employees.

For jobs that require a government security clearance, you will be required to fill out SF-86 (Questionnaire for National Security Positions). That form asks, “In the past seven (7) years have you failed to pay Federal, state, or other taxes when required by law or ordinance?”

You don’t pay nanny taxes. And there goes your promotion or dream job.

Take action now

It’s best to take care of your back tax obligations as soon as possible. Now is an ideal time to get this done especially if you just hired a nanny in the past year.

GTM Payroll Services offers back tax work at reasonable rates. We can help you correct issues and become compliant moving forward. This will save you the time and hassles of doing it yourself and give you peace of mind that it’ll get done right. We’ve specialized in household payroll and taxes for nearly 30 years.

Or maybe you’re unsure if you’re doing it right and would rather not find out at an inopportune time. Call us at (800) 929-9213 for a free, no-obligation consultation and we’ll review your specific situation and help you determine your compliance and next steps.