Paying household employees “on the books” is always the right and smart thing to do. The benefits for families far outweigh any perceived financial savings from skirting tax and other obligations.
The protections for those who work in the home also exceed the relatively small amount of money taken out of their pay for taxes.
The ongoing COVID-19 pandemic has brought all of this into crystal-clear focus.
Not providing legal pay? Easier than ever to get caught.
Families should now understand how easy it is to get caught ignoring their tax responsibilities. When an employee files for unemployment – even if they are not eligible for benefits because they were paid illegally – the state labor agency will follow up with recent employers. If it is found that a family hadn’t been contributing unemployment taxes, they could face fines, penalties, and payment of back taxes with interest.
Nannies and other household employees joined the millions of Americans seeking unemployment benefits during this time, which meant families that were paying off the books had to quickly get caught up with their tax responsibilities or face the consequences of non-compliance.
Or, if the nanny was eligible for paid sick and/or family leave under the Families First Coronavirus Response Act, they could ask for compensation through their state labor agency and would be treated as an unpaid wage claim. Again, the family paying illegally would need to get current on their taxes or pay back wages, damages, fines, and interest.
Not receiving legal pay? No financial benefits in a time of need.
Employees paid “under the table” realized they may not be eligible for paid sick or family leave, full unemployment benefits (including the extra $600/week under the CARES Act), and stimulus payments from the federal government.
That is quite a bit to forfeit in a time of need. Below we discuss the benefits of legal pay for a household employee during “normal times.” That should be enough to understand that being paid “on the books” is the right thing to do for your future.
The pandemic exposed the lack of a safety net for illegally-paid household employees. There was no paid sick or family leave to still have an income while you were sick or cared for someone who was ill. There were no unemployment benefits to get you through a prolonged absence from the workforce. And, there may not have been a stimulus payment that many people in need used to pay bills and rent.
It was an unfortunate wake-up call for many household employees taking pay “off the books.”
Legal pay in the “new normal”
Since these financial benefits were out of reach for those paid illegally, we anticipate that even more nannies will require legal pay from families before accepting a job offer.
They now see what can happen if they are paid off the books. During the pandemic, illegally paid nannies were left unprotected and unable to take advantage of financial support from unemployment benefits, paid sick and family leave, and, possibly, stimulus payments all of which may have helped relieve financial hardships and reduced their stress in an already anxiety-filled time.
Just because nannies are returning to homes to work does not mean the risk of getting sick from COVID-19 is no longer a concern. The pandemic is continuing and there is still a real chance to catch the virus even if workplace protections are put in place. FFCRA paid benefits run through the end of the year and would still be available to a household employee who got sick after returning to work.
As more nannies seek legal pay, the talent pool shrinks even further for families still looking to pay “off the books” and increases the chances of hiring a “less-than-professional” caregiver for your most beloved possession – your children.
According to our survey of nannies from the fall of 2019, already 44 percent of in-home caregivers say it’s “not likely” they would take a job that didn’t pay legally and 33 percent said they wouldn’t take an “off the books” job under any circumstances.
Imagine being a human resources manager looking to fill an important position within the company and only being able to choose from about half of the potential candidates. That is what families who insist on avoiding taxes are up against.
On the flip side, we also see more families requiring their nannies to accept legal pay as part of the position. Maybe the family got caught avoiding their tax responsibilities when their former nanny filed for unemployment. Or they wanted to avoid that scenario, got caught up with their back taxes, and decided legal pay is the right thing to do going forward.
Others, perhaps, saw the impact of paying “under the table” firsthand when their nanny got sick or they no longer needed an in-home caregiver during the pandemic and their employee was left unprotected. Some families chose to continue paying their nanny even if they were not working but that can be unsustainable. A nanny can easily become part of the family when caring for children. To provide benefits and protections for someone important to them, families may decide to put their nanny “on the books.”
Benefits of legal pay for the family
While getting caught avoiding your tax responsibilities and paying a significant amount in fines, penalties, interest, and back taxes, is motivation enough for many families to do it right, they are other benefits to paying legally. You will:
Attract higher quality candidates
When you hire a nanny or other household employee, you are bringing a professional on board. They expect the same benefits and protections of being paid legally afforded to those who work in an office, retail store, restaurant, or other types of workplaces. By doing payroll and taxes the right way, you will pick from a larger pool of qualified candidates and have a better chance of finding the right fit for your family.
Work with a happier employee
Your employee will appreciate the benefits and protections of being paid legally. They have a verifiable income and legal employment history when applying for a loan, credit card, or subsidy in the health insurance marketplace. Also, you and your employee will be paying into their Social Security and Medicare accounts. By treating them like a professional, they will have higher job satisfaction. This leads to a happier family (especially the kids if you are hiring a nanny!) and an easier work relationship with your employee.
Gain financial protections
Workers’ compensation insurance may be required for household employers in your state. The proper coverage ensures that some of your employee’s medical costs and lost wages will be covered if they become ill or are injured on the job. Without it, your employee can sue for lost wages if they are hurt on the job and you do not have the required coverage.
Avoid state and federal fines and penalties
It is easy to get caught paying “under the table.” All it takes is your employee filing for unemployment after you part ways and listing you as their previous employer. They will be denied benefits and you will come under scrutiny for not paying the proper taxes. Or your employee is injured on the job and goes to the emergency room. When they are asked how it happened, they mentioned it was at work. The injury will be reported to your state’s workers’ compensation board, which means you will receive a hefty fine because you are noncompliant and do not carry the required insurance coverage.
Reduce the risk of an audit
Once the federal government realizes you have not been compliant with household employment law, your chances of being audited skyrocket. The audit could just be a hassle if you are not hiding anything else. However, you will likely need to pay back taxes or a fine for paying your nanny “off the books.” According to The Motley Fool, failing to pay employment taxes can cost on average $25,000 in penalties and interest.
Take advantage of tax savings
Your employer’s Flexible Spending Account and/or Dependent Care Assistance Program and the federal Child and Dependent Care Tax Credit can cover some of the qualified expenses associated with being a household employer.
Enjoy peace of mind
All these benefits lead to one major advantage … peace of mind. You will have a solid relationship with your employee and financial protection. You will not have to concern yourself with fines, penalties, audits, or lawsuits. Even if you are audited for an unrelated matter, you will not have to worry about household employment raising red flags.
Benefits of legal pay for an employee
While the current health crisis brought into focus the need to be paid legally for many household employees, benefits will extend throughout their work career and even into retirement. Here are some of the key benefits to legal pay for a nanny or other household employees.
If they apply for a car loan, student loan, mortgage, or even a credit card, they will need to show that they can pay monthly installments. Being paid legally provides that. If their pay is not documented, they have no way to show that they have income.
Legal employment history
Getting paid “on the books” creates a work history. This is also important when applying for a loan, credit, or their next job.
Household employers are required to pay state and federal unemployment insurance taxes. If their employee loses their job, through no fault of their own, unemployment benefits will partially replace their lost wages for up to six weeks while they look for a new job.
Social Security and Medicare benefits
Employees and their employers will pay Social Security and Medicare taxes. This money is set aside to help pay for living and medical expenses when a worker retires. If they are paid “under the table,” they do not receive these benefits and may need to continue working past retirement age.
GTM can help
Ready to get started on legal pay? GTM Payroll Services makes it easy. We handle all of the paperwork, tax filings, and payroll calculations for you. For nearly 30 years, we’ve helped families across the country pay their employees the right way and without the risks, hassles, and worries of trying to do it yourself. Call (800) 929-9213 for a complimentary, no-obligation consultation with a household employment expert or to get started.
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