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Many household workers aren't paid legally
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Zoe Baird withdrew from consideration for U.S. attorney general in 1993 for failing to pay taxes for household employees. -
Kimba Wood withdrew from consideration for U.S. attorney general in 1993 for failing to pay taxes for household employees.
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The rules related to paying taxes for nannies and other household help can be complicated, which is part of the reason a high percentage of nannies and other household workers are not paid legally. Some estimates put the percentage of families who employ household help yet cheat on the nanny tax as high as 80 to 95 percent.
Nanny tax compliance overview
FAMILIES
Benefits
• Receive tax breaks.
• Eliminate financial and legal risk.
• Obtain peace of mind.
• Establish long-lasting professional relationship.
Consequences
• Loss of child-care tax breaks.
• Risk of IRS and/or state audits.
• Back taxes, penalties and interest and potential tax evasion charges.
NANNIES
Benefits
• Earn retirement benefits via Social Security and Medicare contributions.
• Earn unemployment and workers' comp benefits.
• Establish employment history.
Consequences
• No income or health coverage during retirement.
• No income when unemployed or unable to work.
• No ability to qualify for loans or credit.
• Back taxes, penalties and interest and potential tax evasion charges.
"It really depends on the area," said Barbara Kline, president of White House Nannies in Bethesda, Md.
"If there is ever an area where people take the nanny tax seriously, it's the Washington, D.C., area. Most of my clients are lawyers. People in this town have seen others get into serious trouble over this and they don't want that happening to them."
The issue of paying taxes for household workers made big news in 1993 when President Bill Clinton nominated two women -- Zoe Baird and Kimba Wood -- for U.S. attorney general and both ended up pulling their names out of consideration when investigators found they had failed to pay taxes for their household employees.
Caroline Kennedy withdrew her name in 2009 as a candidate for New York's vacant U.S. Senate seat for similar reasons, and outgoing Treasury Secretary Timothy Geithner's nomination also was threatened for tax-related mistakes he made, which also included an issue related to a housekeeper.
In general, families who paid a household worker -- nannies, housekeepers or gardeners -- more than $1,800 in wages in 2012 are responsible for withholding taxes for those employees.
Stephanie Breedlove, a payroll tax expert for the household worker industry, has built a company that helps about 10,000 families nationwide set up payroll systems and stay in compliance with the nanny tax law.
The idea for her business came shortly after she hired a nanny. She could not figure out how to pay the worker legally and she did not personally know of anyone who was following the rules. She launched her business about six months before the "Nannygate" scandal involving Ms. Baird and Ms. Wood.
"When the scandal broke, it was very helpful in bringing more awareness to what we do," said Ms. Breedlove, a partner at Breedlove and Associates in Austin, Texas. "It was the first time media attention became focused on this large group of workers who were not being paid legally,"
She estimates between 5 million and 10 million people work in the household care industry.
Ms. Breedlove said families who pay the nanny tax are eligible for child care tax credits of between $2,000 and $2,500 depending on their tax rate. Families also are likely to have a stronger and longer relationship with household workers when they are paid legally, and the family doesn't have to lose sleep worrying about potential back taxes or penalties that come with tax evasion charges, she said.
But caregivers are by far the biggest winners and the biggest losers when it comes to the nanny tax.
"Employers are contributing to their retirement via Social Security and Medicare, which is significant," Ms. Breedlove said. "The workers can receive up to five times what they put in during their working careers. That is significant for making it through their golden years.
"Also, when you are paid legally, you get a credit history," she said. "It's almost impossible to get a car loan or home loan without a pay stub to prove you are working. Another important benefit when workers are paid legally is access to unemployment benefits when they are between jobs."
None of these benefits are available to household employees who do not receive a payroll check.
Pittsburgh certified public accountant Howard Davis said he handles payroll issues for clients who have full-time household workers. Not all workers want to be on an official payroll even when their employers are willing to set up a system.
"I've had cases where the housekeeper or babysitter doesn't want to be paid legally. They want to be paid cash," said Mr. Davis, president of the Davis, Davis & Associates accounting firm, Downtown. "It becomes a real quandary for the parents.
"They wonder how much to trust the person to take care of their child if they don't want to be paid legally," he said.
The IRS form Schedule H has been referred to as the nanny tax form. Federal data shows the number of Schedule H forms filed by U.S. taxpayers has declined from 320,377 in 1996 to 225,441 in 2006 -- the latest year data is available.
The nanny tax does not apply to everyone who does work at a private residence, only workers whose hours are controlled by the person hiring them.
Contractors who are hired to do specific jobs -- such as lawn mowing or pool cleaning -- at the house do not fall under the nanny tax. But if the homeowner dictates what days and what hours a worker reports to the house for housekeeping or childcare duties, there is a good chance the nanny tax laws apply.
First Published February 19, 2013 12:00 am
