Saturday, February 7, 2009

The Nanny Tax Nightmare

Newsweek Article:
The Nanny Tax Nightmare

The perils of trying to comply with our Byzantine payroll laws—and how Washington can make the system easier for parents who want to do the right thing.

By Maja Beckstrom
Newsweek Web Exclusive

It's a good thing I haven't been tapped for public office. As I discovered last year, it's frighteningly easy to run afoul of the nanny tax, even when you're trying to follow the rules.

I dedicated dozens of hours to paperwork and even so, missed a payment for my nanny's unemployment insurance taxes. The $250 fine hurt. But the worst came later when my husband and I had to part ways with our nanny, in part because we were spending so much trying to comply with I.R.S. rules that we couldn't give her the raise she wanted. And so, on behalf of the hundreds of thousands of families like us, I'm hereby asking Washington to make it a little easier for us to do the right thing.

My husband and I had avoided the nanny-tax hassle for years, relying on grandma, flexible job schedules, an au pair who was exempt, and a parade of high-school and college babysitters who we didn't pay enough to hit the tax threshold. Last year we hired a young woman to watch our three children 20 hours a week, and we suddenly found ourselves owing payroll taxes. It was as if we'd morphed into a corporation. We weren't prepared for how expensive it would be, nor for the hair-pulling, late-night sessions in front of an Excel spreadsheet. As a friend said, "I have to do as much work to pay my nanny as 3M does to pay its employees."

I started polling friends about nanny taxes this week after President Obama's pick for chief performance officer, Nancy Killefer became yet another casualty of a nanny tax scandal. If you want to separate your real friends from your Facebook "friends," by the way, ask whether they pay the nanny tax. If they don't trust you, it's an awkward conversation. About half my friends with nannies pay the taxes, including one lawyer dad who said he wouldn't be able to sleep at night if he didn't. "If I'm not paying this, then the woman who takes care of my children is not going to get the Social Security she deserves," he said. "For a lot of nannies, it's not like down the road they're going to be making so much money that it will replace these low earning years."

Then there was my friend who pays a babysitter to watch her child while she attends school. When I told her late one night that she owed the nanny tax, she paused, and then said with utter fatigue, "I'm just going to forget we had this conversation." I happen to know she would have been forced to cut into her grocery budget to pay even a couple more dollars an hour. And those few bucks can add a surprisingly amount to the cost of childcare.

For us, paying the tax meant an extra $200 a month. For some families, the extra hit can be the difference between making money by going to work, or barely breaking even. Call me naive. We hadn't factored in taxes when we agreed with our nanny on an hourly rate. Suddenly her $14 per hour wage turned into a $16.50 per hour expense after we added federal and state unemployment insurance tax and 15 percent in FICA taxes (6.2 percent for the employee portion of Social Security, another 6.2 percent for the employer portion; 1.45 percent for the employer portion of Medicare and another 1.45 percent for the employee portion). We could have taken the employee portion out of her wage, but we knew she would have seen it as a pay cut.

As it turned out, we ended up mutually parting ways before she'd been with us a year. She wanted a raise. And after paying FICA, we simply couldn't pay her more. Meanwhile, we were competing against families who can pay more because they pay in cash. Even if you can afford to match the competition and still pay the nanny tax, the paperwork alone might be enough to send you over the brink. One friend tried to calculate her nanny taxes herself. She got it wrong and was fined. And she is doctor who understands statistics. "Trying to pay this on our own created so much stress," she said. "It seemed ridiculous that it should be that difficult." She ended up forking over $500 a year to have a payroll company handle it.

You can't even trust your accountant to get it right. After we got inaccurate advice from our tax-prep firm we too tackled the tax ourselves. I applied for a federal and a Minnesota tax ID number, printed out weekly payroll receipts and calculated the Social Security and Medicare taxes to withhold. I stayed up past midnight trying to fill out a quarterly wage detail on the Minnesota State Unemployment Web site before the deadline passed and we were fined … again.
I'm not suggesting that we eliminate this requirement, but we should not have a system where anyone who's ever hired a summer babysitter and not paid the tax is made unfit for public office. Parents owe payroll taxes if they paid a nanny more than $1,600 in 2008. Let's raise that threshold. And simplify the paperwork. In the meantime, here's my advice: If you aspire to public office, hire a company to handle your nanny tax. Or, enroll your child in the nearest child-care center. It's cheaper, you won't have to bother about taxes. And, you'll meet more of your constituency.

Maja Beckstrom Lives In St. Paul, Minn., Where She Writes About Family And Parenting For The St. Paul Pioneer Press. She Originally Blogged About The Nanny Tax For The Newspaper's Parenting Web Site, Minnmoms.Com. She Plans To Devote This Weekend To Figuring Out Her Former Nanny's W-2 Form.

URL: http://www.newsweek.com/id/183487

Any thoughts on the topic? Click "comments" below.

15 comments:

Best Nanny Newsletter said...

Nannies, you should buy inexpensive nanny tax software and give it to your employers. It is inexpensive and easy-to-use. You protect yourselves as an American citizen by paying taxes as required by law.

Don't let parents say the paperwork is too difficult. Do their employers say that to them?

American citizens working in other professions cannot moan and groan about paying taxes and expect not to pay what is required by law because tax forms are difficult to manage!

The idea that paying taxes is hard is ridiculous because with computer software it's not at all difficult anymore and paying taxes it's required by law whether it's hard to do or not.

All American citizens must make the time to fill out the IRS paperwork before working, whether hey like it or not and whether it takes time or not.

Sorry if it make some time to do, but that's just life.

If you are a parent you may not want to be an employer but when you hire someone to work in your home you become an employer. Period. You don't have to like the responsibilities that go hand-in-hand with being an employer, but that's tough.

Excel sheets aren't need these days. There are dozens of INEXPENSIVE nanny tax software available. Just google "nanny tax software" and you'll find dozens. The software does the work for the employer. Excel sheets are not needed!!

It literally takes my boss (father) two minutes each Friday morning at the kitchen table to open his laptop and type in how many hours I worked that week into the nanny tax software. Then he writes me the check with the number the software puts out.

It took me less than ten minutes to hand him my social security card and driver's license to photocopy to confirm I am eligible to work in the United States and for me to fill out the proper IRS paperwork so I can work legally.

Every citizen of every profession must do the same.

Not much to ask when there are federal, state, and country roads to maintain, public schools to educate our children, and soldiers to equip with supplies. In this economy I like knowing I pay taxes in case I am laid off and must file for unemployment. What if I get hurt and need to accept disability benefits?

I deserve the benefits afforded me as a citizen of the United State of America and I do that by paying taxes as legally required by law.

Anonymous said...

Politicians should simplify the tax code and treat everyone as self employed. But at the same time just because it is difficult to understand, we still should follow the law. But changing things would simplify everything for everyone and encourage more domestic employers to actually comply. Nannies and parents that employ them aren't the only ones evading paying taxes. But that doesn't make it right. We can rally to make the laws easier and simplify the process while following the law and continue to pay legally.
Meredith Swan, Nanny, Newborn Specialist, CT

Anonymous said...

I have been reading and hearing about all of this NannyGate drama for weeks and I finally feel the need to post something.

NannyGate is a huge problem for this country and if simplifying the process would encourage more nannies to get paid on the books legally then we should definitely do it.

But, in reality if people can "beat the system" and figure out how to not pay taxes and not get caught, than they will do it.

What annoys me most is parents complaining about the cost to pay taxes?!! Parents do NOT pay more to file taxes!! They WITHHOLD THAT MONEY from the employee's (nanny’s) paycheck then pay the government when required.

For example, a nanny making $1,000 per week won't take home more than $750 - $775 per week.
But that difference stays in the parent's bank account until time to pay taxes. The difference is calculated by the employer's nanny tax software (the parents I work for use Essentia I think). My employer keeps that money until time to submit the taxes.

Then, the nanny (me) gets a substantial refund at the end of the year. In fact, the refund may be a hefty one if s/he can claim deductions.
It's the employee's (nanny's) take home salary that is affected, not the parent's.

Even so, no one wants to pay taxes. Everyone wants to pay less.

If simplifying the system for those without the appropriate software would encourage parents and nannies to pay taxes it would be great.

But, I do not think the difficulty of filiing is really why parents aren’t paying taxes.

The real reason is they want to be scuff laws.

I think the nation has a lot more pressing topics to deal with at the moment and parents and domestic employees cannot use the argument of taxes being difficult to file as an excuse to break the law.

Melanie R., Professional Nanny, Cambridge, MA

Anonymous said...

Most Americans can only wish they had this problem. Most nanny employers are in a financial salary bracket that can afford to hire a CPA to do their taxes for them. This shouldn't even be an issue for them. If they aren’t wealthy enough to afford an accountant to the tax paperwork for them than the other commenters are right, then they should buy the software to do it for them.

In three minutes I just googled the following sites and there are more I am sure:

www.nannytaxprep.com
www.nannypay.com
www.breedlove-online.com
www.gtm.com
www.householdemploymenttaxes.com
www.4nannytaxes.com

Anonymous said...

The reason we cannot treat nannies as self-employed is that a nanny does not fit the IRS definition of an independent contractor. Nannies are defined as an employee because the employer controls the nanny's responsibilities making the nanny an employee, and requiring him or her to pay taxes.
Miriam, Nanny, Dallas, TX

Anonymous said...

I am a nanny and am smart enough to do my taxes. Not that tricky. Garbage collectors, waitresses, seamstresses, maids, pilots, cashiers, receptionists, CEO’s, and each and every worker is required to pay taxes. Just because you are a parent or domestic employee doesn’t make you special and somehow allowed to break the law.
Natasha, Career Nanny, Portland, Oregon

Anonymous said...

I really don't get the difficulty. Doesn't it take the parents time to fill out their personal taxes from their jobs anyway? It's just part of the routine of being an adult. IRS has all the forms online. It's not that hard. I spend a Saturday each year and file my taxes. No big deal.

Anonymous said...

Everyone wants to pay less taxes and that is the American way! Free capitalism without socialist laws. Everyone tries to cheat the government out of taxes and for domestic workers it's easy to do.

Anonymous said...

Parents need to stop blowing things out of proprtion. It isn't that hard to pay taxes. If it is difficult for a parent s/he simply hires an accountant. Not hard.

Anonymous said...

Very easy to download the proper forms from IRS.gov. Do not let these parents make a cheat out of you.

Anonymous said...

There are some awfully self-righteous comments made by people who identify themselves as nannies. None of them seem to want to admit the other side of the coin: nannies who want to be paid under the table because they (the nannies) don't want to pay taxes on their earnings. I've encountered more than a few nannies like this since I've become to interview possible childcare providers. It's not necessarily a matter of being here illegally. One such prospective nanny that I interviewed (but am not using) is a US citizen who just doesn't want taxes taken out of her check. We live in a high tax state, and I realize that, but everyone - including nannies - has to pay taxes. So anonymous thinks parents need to stop blowing things out of proportion? Maybe nannies need to stop trying to hide their earnings under the table. As anonymous said, it's not that hard to pay taxes. Not hard at all. And yes, I pay a fair salary. I just don't want to do it under the table.

Anonymous said...

"What annoys me most is parents complaining about the cost to pay taxes?!! Parents do NOT pay more to file taxes!! They WITHHOLD THAT MONEY from the employee's (nanny’s) paycheck then pay the government when required."

Apparently the poster who wrote this does not understand enough about payroll taxes to realize that his/her statement is incorrect. The parents actually DO have to pay additional taxes on the nannie's salary that do NOT come out of the nanny's pay. The state in which I reside has laws which specifically indicate that employers must pay unemployment tax, and the funds for this cannot be deducted from the worker's pay. There are a number of states that have this regulation.

Anonymous said...

And there are a variety of reasons nannies have for wanting to not have their earnings reported to the IRS. Another would-be nanny that I encountered had previously lost a job and was drawing unemployent benefits when we met. If I'd hired her and filled out the proper forms, she would have lost her benefits. The pay I offered would have exceeded her benefits. But she felt it was better for her to be able to be paid under the table so that she could continue getting her unemployment benefits. I don't know her personal situation, and perhaps she really needed the money. All the same, I can't claim any child care expenses for deductions on my taxes if I don't go through the trouble of meeting every state and federal requirement for filing taxes.

I noticed comments here like "American citizens working in other professions cannot moan and groan about paying taxes and expect not to pay what is required by law because tax forms are difficult to manage! " I'd love to see these nannies hold their own peers to this standard. It makes life easier for parents who want to file taxes properly.

NannyMichelleDE said...

It is so inticing to not pay taxes. Keep all the money and spend it how you like.

I think every single commenter agrees that NO ONE WANTS TO PAY TAXES. Not nannies, not parents, not teachers, not book keepers, not celebrities, not garbage men, not librarians, not executives, not retailers, not anyone.

It's the great American sport -- trying to not pay taxes, or lower taxes, finding tax loopholes, find more tax credits....

The point is that it's the law. Yes, it stinks to pay taxes. There are some protections though, especially if you need credit. To lease or buy a car, apartment, mortgage, and find another job it's important to be paid legally.

Until tax laws change or are made easier we just all ought to follow the law. If not, you just might get screwed.

Most domestics do not pay taxes and most nanny employers do not submit taxes on behalf of their employees because they want to save money and time and they get away with it.

Smart nannies and parents would be smarter though to look at the big picture and consider the risks of not paying (or being paid) legally.

Nanny Michelle, Delaware
The

Anonymous said...

In direct response to the last part of the article: they have moved the threshold slightly since 2008. It is now $1700. So that's a move in the right direction, small as it may seem. Anonymous on May 15 5:01pm, you are right. The employer does have to pay taxes above and beyond the employee's withheld taxes. They need to pay unemployment insurance and MATCH the social security and medicare taxes the employee is paying. Anonymous on Feb 8 9:05am can refer to IRS publication 926 to prove this. For you law-abiding citizens that do pay the tax, a payroll company is definitely the way to go. Thanks to the government, it is really a specialty area. GTM is a great company. It can be found at www.gtm.com and they give free tax advice if you call them. They're 20 years old so they probably know their stuff.