We’ve laid out the consequences for 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 you’re trying to the right thing.
Nanny Tax Missteps #1: Fail to understand wage laws
You hire a nanny and agree to pay “over the table.” You decide on $10/hour for 50 hours of work 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 need to be paid minimum wage and receive time and a half for any hours worked over 40 in 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.
Your nanny realizes she is being underpaid and can sue you for back wages.
Families that hire a domestic worker need to be aware of all federal, state, and even local wage requirements so employees are paid legally from the start. Then you must monitor any changes to wage laws so you can remain compliant. For example, a number of states increased their minimum wage for 2018.
Nanny Tax Missteps #2. Forget to pay unemployment taxes
You hire a housekeeper, make sure to follow wage laws, and withhold 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.
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.
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
Everything is going great with your new nanny. You’re paying her legally and withholding and paying all of the proper taxes. Then she gets hurt on the job. She goes to the hospital and says the injury occurred while she was working. A workers’ compensation claim is opened. Coverage for household employers is required in your state but you didn’t know you need to have a policy.
Open your wallet as both the state and your employee will be asking you for money.
First, expect to be contacted by your state’s workers’ compensation board. The fine can be hefty. In New York State, for example, you could face a fine of up $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 run into the thousands of dollars. If your nanny misses significant time because of the injury, you also need to pay a fill-in nanny or some other form of child care.
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 handle your worker’s compensation coverage. We’re a licensed insurance broker and 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
You thought you hired a great nanny but it’s not working out. She was late twice in one week causing havoc to your own work schedule. After the second time, you tell her that she’s 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 she gets three warnings for being late before she can be fired. You only gave her one making her firing a wrongful termination.
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.
Having a work agreement and an employee handbook is always a good idea when hiring someone to work in your home. You need to follow your policies as much as your employee. Even without a written policy, a firing can result in a wrongful termination. Let’s say you adore your nanny and, on a number of occasions, you tell her that she can work for you until your children are in school. Your situation changes and you need to 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 being done right.
Our domestic employment experts will also make sure you’re aware of all federal, state, and local tax, wage, and labor requirements so 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.
On top of payroll, taxes, and insurance, we offer a number of resources to help you with employee management. There’s an HR Help Desk to learn how to handle certain situations (like firing an employee) as well as guidance on creating an employee handbook. All GTM clients also receive a copy of How to Hire a Nanny: Your Complete Guide to Finding, Hiring, and Retaining Household Help.
Call us at (800) 929-9213 for a free, no-obligation consultation on your domestic employment situation.