We’ve outlined the consequences of intentionally avoiding nanny taxes and getting caught. But what about families who want to do it right but make a mistake and find themselves in trouble? Getting nanny taxes right can be confusing and time-consuming, especially if you’re trying to do it yourself.

Here are four easy nanny tax missteps with tax, wage, and labor laws, even when trying to do the right thing.

Nanny Tax Missteps #1: Fail to understand wage laws

Situation

You hire a nanny and agree to pay “over the table.” You decide on $12/hour for 50 work hours per week. However, you fail to realize that nannies and other household employees are protected by the Fair Labor Standards Act (FLSA). That means they must be paid minimum wage and receive time and a half for hours worked over 40 a week.

You didn’t pay for overtime, and while the hourly rate exceeds the federal minimum wage, the rate is higher in your state. A household employee must be paid at least the federal, state, or local minimum wage, whichever is highest.

Consequences

Your nanny realizes they were underpaid and can sue you for back wages. Or they can file a complaint with your state’s labor department.

Solution

Families that hire household employees must be aware of all federal, state, and local wage requirements so employees are paid legally from the start. Then, you must monitor any changes to wage laws to remain compliant.

Nanny Tax Missteps #2. Forget to pay unemployment taxes

Situation

You hired a housekeeper, followed wage laws, and withheld Social Security and Medicare taxes. However, you didn’t know that household employers also owe unemployment taxes. When your housekeeper is let go through an amicable split, she files for unemployment. However, the state has no record of unemployment taxes being paid.

Consequences

You can expect a notice 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 didn’t pay.

Solution

Educational resources like The Complete Guide to Household Payroll will walk you through every step you need to take when complying with tax laws.

Nanny Tax Missteps #3. Overlook required insurance coverage

Situation

Everything is going great with your new nanny. You’re paying them legally and withholding and paying all the proper taxes. Then, they get hurt on the job. They go to the hospital and say the injury occurred while working. A workers’ compensation claim is opened. Coverage for household employers is required in your state, but you didn’t know you needed a policy.

Consequences

Open your wallet, as the state and your employee will ask you for money.

First, expect your state’s workers’ compensation board to contact you. The fine can be hefty. In New York State, for example, you could face a fine of up to $2,000 per every 10-day period of noncompliance. Additionally, the fine for a criminal conviction is from $1,000 to $50,000.

Next, you’re now liable for your employee’s lost wages and medical costs, which could be thousands of dollars. If your nanny misses significant time because of the injury, you must pay a fill-in nanny or find another form of child care.

Solution

Obtain a policy. Your homeowner’s insurance policy may not provide adequate coverage. You’ll need to find a licensed insurance broker to get a policy. From there, you’ll need to handle all claims, invoices, and audits.

Another option is to have GTM Insurance Agency handle your worker’s compensation coverage. As a licensed insurance broker, we can obtain a quote; apply for a policy on your behalf; and take care of claims, invoices, and audits. This way, you get the proper coverage without the hassles of trying to do it all yourself.

Even if you live in a state where workers’ compensation is not required for your domestic employment situation, obtaining coverage is a good idea. It could protect you from a lawsuit by an injured employee.

Nanny Tax Missteps #4. Firing your employee results in wrongful termination

Situation

You thought you hired a great nanny, but it’s not working out. They were late twice in one week, causing havoc to your own work schedule. After the second time, you tell them that they’re fired. Domestic employment is considered “at will.” This means you can fire your employee for any reason or no reason at all. However, you still need to follow contractual obligations. Your employee handbook states that they get three warnings for being late before they can be fired. You only gave her one, making her firing a wrongful termination.

Consequences

You can be sued for wrongful termination. Damages could include back pay, reinstatement, front pay, compensatory damages, punitive damages, lost benefits, emotional distress, and attorneys’ fees.

Solution

A work agreement and an employee handbook are always good ideas when hiring someone to work in your home. You need to follow your policies as much as your employee. A firing can result in a wrongful termination even without a written policy. Let’s say you adore your nanny and, on several occasions, tell them they can work for you until your children are in school. Your situation changes, and you must let your nanny go before your children are school-age. Those oral representations may create an implied contract between you and your nanny even without a written employment contract. The implied contract exception to at-will employment is recognized in more than half the states.

GTM can help

You can avoid the worries, hassles, and stress that come along with household employment by partnering with GTM Payroll Services.

We’ll calculate your employer and employee taxes – even the ones that are easy to miss. Then we’ll remit your taxes on time, every time. You’ll remain compliant and enjoy peace of mind knowing that your nanny taxes and payroll are done right.

Our household employment experts will also help ensure your employees are paid legally from the start. We also monitor any changes to wage laws and will inform you so you can make any adjustments to pay and remain compliant.

Call us at (800) 929-9213 for a complimentary, no-obligation consultation.

Download The Complete Guide to Household Payroll

Get our complimentary guide and learn everything you need to know about paying your employees legally and filing your taxes the right way.