For a few reasons, a nanny may want to be paid half on and half off the books. Perhaps they qualify for a health insurance subsidy that will disappear if they make too much money. Or they want a higher take-home pay and not fulfill their entire tax obligation.
To a family, this may seem like a reasonable compromise especially if you like the caregiver. It still looks like you are paying legally and your employee keeps their subsidized health insurance or has more money in their pocket. Plus, with your employee’s lower reported wages you save on taxes too. Everyone is happy. Right?
Here are four key reasons why this is a bad idea even if well-intentioned.
1. Your nanny files for unemployment
For whatever reason, you and your nanny part ways. Your kids are now in school and do not need a full-time caregiver. You or your nanny moved and their new commute does not make sense. So your nanny files for unemployment. They claim their full wages – not just want was paid to them legally and reported to the state. Now your state labor agency is wondering why your employee says they were paid $600/week when you were only reporting $300/week.
Now you need to correct your previous tax filings, pay back taxes, and face stiff penalties plus interest on the unpaid taxes. That can easily add up to thousands of dollars. Your nanny’s unemployment benefits will also be delayed as the state sorts it all out.
But wait, there is more.
Your state will share this information with the IRS. And now you need to amend your previous federal tax returns, pay more back taxes, penalties, and interest. In this case, you will be responsible for both the employer and employee portions of Social Security and Medicare taxes on the unreported wages.
2. Your nanny also gets in trouble for fraud
Your caregiver does not come out of this unscathed when they file for unemployment and report their full wages. If they were receiving subsidized health insurance due to their income, then they illegally took public assistance. Your nanny will be subjected to fines and penalties for defrauding the government. They may also have future wages garnished by the state to make up for the lost taxes.
3. You do not get full savings from a DCAP and/or tax credits
As part of the American Rescue Plan, contribution limits to a Dependent Care Assistance Program (DCAP) offered through your employer, increased to $10,500. A DCAP (or sometimes called a Dependent Care FSA) offers a way to set aside tax-free money to pay for child care like a nanny’s wages.
The Child and Dependent Care Tax Credit also increased to $8,000 for one child and $16,000 for two or more children. A nanny’s wages are considered a qualifying expense for the credit.
Depending on your tax bracket and nanny’s wages, you can actually save money by paying your nanny completely on the books. We break it all down here.
By paying half on and half off the books, you do not realize these full savings.
4. There are other options for health benefits
If your nanny wants to receive half their pay under the table to keep their health insurance subsidy, there are other legal options that can help support their health benefits.
Setting up a Qualified Small Employer HRA (QSEHRA) or an Individual Coverage HRA (ICHRA) puts tax-free money into an employer-funded account, that your nanny can access to pay for health insurance purchased on the individual market or health care exchange and out-of-pocket medical, dental, and vision expenses.
The tax savings from an HRA can help partially or even fully replace the amount of a potential subsidy. Plus, you will be doing it above board so there is no risk of fines, penalties, and payment of back taxes if you get caught paying your nanny half off the books.
GTM can help with paying your nanny on the books
If you have been paying partially off the books, GTM can help you become fully compliant with tax, wage, and labor laws. We can do your back tax work and get you in the good graces of your state tax agency and the IRS. It is much better for you – and in the eyes of tax agencies – if you voluntarily admit to wrongdoing and pay up rather than waiting to get caught. From there, we can manage your household payroll and nanny taxes, so there will be no more issues. Our licensed insurance brokers can also set up a QSEHRA or ICHRA for you to help with your employee’s health care. It’s truly one call for all your payroll, tax, and insurance needs. For a complimentary, no-obligation consultation, call (800) 929-9213 and talk with a household employment expert. Can’t talk now? Schedule time with us at your convenience.
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