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The Ethical Nanny Diaries

Dec21

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Hi Amy,

After staying home with my little guy for a little over a year, I’m about to start working part-time. After exploring all the childcare options, we’ve decided to hire a part-time sitter/nanny to care for him in our home. But my husband and I are having a difference of opinion about one thing: He wants to pay her under the table, while that kind of arrangement makes me nervous. Granted, we’ve always paid our nights and weekend sitters cash the handful of times we’ve used them, and he doesn’t see the point in doing anything different for a part-time, non-live-in sitter during the day. And while I don’t really know all the legal ins and outs, I feel like 20 hours a week is enough to require us to pay taxes and/or get us into trouble if we were ever to get audited. Am I right? 

My sister (the only other person I know who ever employed a nanny) agrees with my husband, but admitted her reasons for not paying taxes was more all the paperwork was a big, scary pain. She also said that most nannies WANT to work under the table and we’d have a harder time hiring the right person. 

But still. It feels shady to me, like sending my son to an unlicensed day care or something! Am I making a big deal over nothing or can you point me in the direction of easy-to-understand resources on what’s required of us?

Just sign me,

Last Ethicist Standing

Sorry, Husband and Sister! But you’re both in the wrong here. While it’s true that m0re and more families are skipping the nanny taxes, the whole “everybody does it” excuse isn’t going to save your butt if the IRS decides to notice.

Sittercity has the best, easiest-to-understand resource on nanny taxes I’ve come across. For your husband, who thinks part-time nannies are somehow exempt:

If you pay your nanny more than $7,000 in 2011, you must withhold and pay Social Security and Medicare on all her wages over $1,700.

If you paid your nanny $1,000 or more a quarter in 2011, you must pay the federal unemployment tax, or FUTA. (You may also owe state unemployment taxes.)

Let’s say you pay your nanny $12 an hour for 20 hours a week, 50 weeks a year with two weeks off and…yep. That’s 12,000 very taxable dollars a year.

The only nanny arrangements that DON’T require paying taxes are ones involving a spouse, parent or your own child under the age of 21. If they’re watching your child, you’re golden. But once you hire someone, you must declare them on your taxes, and there’s just no legal wiggle room to debate. If you pay under the table, you are coloring outside of the lines and potentially exposing your family to a lot of liability down the road. (Not to mention you could unintentionally be aiding your nanny in some shady double-dipping behavior, like drawing unemployment benefits from a previous legal job while also collecting paychecks from you.)

As for your sister’s argument that nannies want to be paid under the table and you won’t attract as many candidates? Eh. There are actually many reasons why a good, professional nanny would WANT to be employed legally. Yes, having taxes and Medicare withheld from hourly earnings sucks, but so does unemployment. Or trying to procure an apartment or car loan without an actual employment history. Or retiring without any Social Security. Put “no under the table arrangements, please” on your ad and if people balk at that, well, maybe they weren’t necessarily the right candidate for you anyway.

The Sittercity page I linked to goes into all the details of what you need to do once you do decide to follow the tax rules. If you guys ever get help preparing your taxes, your adviser can absolutely help you with this task, too. And if you or your husband are offered Flexible Spending Accounts through YOUR employers, you can use those to squirrel away pre-tax income to help pay your child care bills (there are also tax credits you may qualify for). Both are nice perks to keeping things above the table and legal, if removing the fear of the IRS breaking down your door and demanding thousands and thousands of dollars in back taxes isn’t enough.

Photo credit: Thinkstock

About the author

Amalah

http://www.amalah.com
Amalah is a pseudonym of Amy Corbett Storch. She is the author of the Advice Smackdown and Bounce Back. You can follow Amy's daily mothering adventures at Amalah. Also, it's pronounced AIM-ah-lah.

If there is a question you would like answered on the Advice Smackdown, please submit it to amyadvice@gmail.com.

Amy also documented her second pregnancy (with Ezra) in our wildly popular Weekly Pregnancy Calendar, Zero to Forty.

Amy is mother to rising first-grader Noah, preschooler Ezra, and toddler Ike.


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17 Responses to “The Ethical Nanny Diaries”

  1. heidikins Dec 21 at 11:57 am Reply Reply

    I totally agree with Amy here. Also, you can write off some (or perhaps even all, depending on the dollar amount) of your child care expenses on your own taxes if you do it the legal, over-the-table way where your nanny has the other half of that tax equation when she files her own return.

    xox

  2. Olivia Dec 21 at 11:57 am Reply Reply

    Whew! I was scared there for a moment, but we really only hire a baby sitter occasionally. Even when she worked 40 hrs a week that was for only a week at a time, and no where near $1,000 per quarter.

  3. MamaCarter Dec 21 at 12:31 pm Reply Reply

    Under state law you may also be required to have disability and workman comp insurance. Failure to do so can – at least in the state of NY – garner you a whopping 10K fine. Trust me, I know; I got one of those fines when we accidentally signed up for one but not both types of insurance. It all worked out, but that was the scariest thing that has ever happened to me.

  4. andrea Dec 21 at 12:37 pm Reply Reply

    The other nice benefit of thing going legit is that you are establishing that this is a professional arrangement.  Talk about holidays and vacation time up front as well and get everything in writing.  You don’t want your nanny to tell you the day before that she’s taking off for a week or just quitting!  

  5. Jen K. Dec 21 at 1:08 pm Reply Reply

    We have a nanny, and found it well worth our money to hire a payroll service (there are ones that specialize in nannies) to take care of getting the employer IDs, and doing our weekly payroll. They even file and submit our tax paymetns for us, and complete the schedule for our federal taxes (which allows us to take a tax deduction). That combined with the tax savings from using a flexible spending account really helps. We made it clear that we were paying on the books, and still got plenty of good applicants.

  6. J Dec 21 at 1:13 pm Reply Reply

    I dont disagree that the “right” thing to do is to pay legaly, but your husband is certainly correct that you will turn off candidates paying legally. and it is in fact a paperwork nightmare. in califronia, i am required to file FOUR pieces of paper EACH QUARTER. that is SIXTEEN filings. it is ridiculous. and the cost, even using flex spending, is about 10% more than you pay her. so, if you pay $10 an hour (e.g. in a nanny share), it’s more like $11 once you add taxes.

  7. jL Dec 21 at 1:28 pm Reply Reply

    4NannyTaxes has a great calculator that is free. It will even create a paystub for your nanny. You just put in the gross pay, the state, and his/her filing status and it does the work for you. FREE. All you have to do is register. I think the hardest part of the whole paying the nanny legally thing was that we had to get a TaxID number or something like that but it wasn’t to complicated.

  8. Jen Dec 21 at 2:50 pm Reply Reply

    We hired a nanny for our twins when I went back to work. She was with us a year and we did it legit with payroll taxes and unemployment. So glad we did. When I quit my job rather unexpectedly she was able to qualify for unemployment benefits. She has two kids of her own and I am glad she was able to collect those benefits, because by the time we had to let her go, she wasn’t just a faceless entity “the nanny” she was a person who had taken care of our kids 20 hours a week for more than a year. The least we could do was take care of her. 

  9. Mrs. CPA Dec 21 at 2:51 pm Reply Reply

    It’s probably a good idea to talk to a CPA or tax advisor. That way, you know you have your bases covered. We do this kind of thing all the time for people, and it isn’t really complicated – but if you mess it up the IRS loves to penalize people, it’s free money to them! You’ll have a filing requirement probably quarterly for state unemployment, and then you have a W-2 & W-3 to file (which is what you need a tax ID number for) and then you actually pay the taxes in with your tax return if you want. So if you have enough withholding alrady you won’t necessarily have to write a check. This is how you will pay in your Federal Unemployment tax as well. EAch state has can have some different requirements for unemployment and/or worker’s comp. You can just pay the nanny and not withhold anything and pay in both portions of the social security and Medicare tax and gross up her W-2 or you can withhold from them. You don’t normally do State or Federal Taxes from the checks. If you want to take the child care credit you have to put in a name and social security number on the form and the IRS goes to that social security number to check and make sure that person has reported it as income. If you try and take it as flexible spending to pay the nanny and then she won’t give you her social security number you will have to pay tax on the disbursements from the flexible spending account and you won’t get the credit for child care expenses (there’s a relationship between the credit and using pretax money, and in certain circumstances you can do all pretax and get a little bit of a credit too).

  10. Oh, Crap Dec 21 at 2:53 pm Reply Reply

    I should have thought twice before choosing that username, haha.

    I used to be a nanny, and I actually refused to work under the table. I just felt more comfortable when parents paid me legitimately, because I knew that if something went wrong in the working relationship, I was protected by labour laws just like any other employee.

    There ARE honest nannies out there hold out for one of them!

  11. Jay Dec 21 at 3:57 pm Reply Reply

    Definitely do the “right” thing and pay legally. Intuit.com does the payroll very cheaply and the customer service is very good. A nanny who only wants to be paid under the table seems shady and unprofessional to me–not someone I’d want watching my kids.

  12. LB Dec 21 at 7:10 pm Reply Reply

    My aunt was an under-the-table child care provider for about 20 years. She ran a small in-home daycare, usually watching 3-6 kids from 1-3 families at a time. She hasn’t done it for years, but as she’s gotten into her 60’s, I know that she regrets not paying into Social Security since she doesn’t have nearly as many credits as she wishes she had.

  13. Molly Dec 22 at 8:05 am Reply Reply

    We didn’t put anything about under the table or above board in our ads for a nanny and only brought up our desire to do everything legally at the interview. We only had one candidate balk at the idea, and our top choice (who is amazing) has always worked legally in her previous jobs. So far (6 months in) I am pleased with how straightforward all the paperwork is. The IRS has a great guide, Publication 926, that spells everything out to make it as easy as possible.

  14. Liz Dec 22 at 5:16 pm Reply Reply

    The first time we hired a nanny we filed all the correct paperwork, made her sign a contract, kept taxes, had workman’s comp,etc. It seemed like such a pain but I felt better knowing we were doing things the legal way. Then I found out she had been lying regularly and ended up letting her go. She filed for unemployment and one of the main reasons she was denied was because I had all the correct paperwork to back up my claims. (I’m making a very long story really short here, fyi). Everything was legit and on the books. SO HAPPY I had it!

  15. Linds Dec 22 at 7:00 pm Reply Reply

    I am also a nanny who insists on a professional relationship where we discuss money, taxes, vacation up front. There are contracts, and there is paperwork. I also have a CPA do MY taxes (which are their own brand of nightmare what with long-term nanny jobs and lots of babysitting jobs on the side). I once had a former employer who decided they wanted to renege on part of my contract and their contributions on paycheck withholdings that required a lawyer on my part to deal with. If I had done it “under the table” I would have ended up owing the IRS thousands of dollars.

  16. Clueless Dec 30 at 3:29 pm Reply Reply

    My husband and I actually refused to use a friend’s mother as a nanny even though she would have been cheaper and more convenient because she did not want to provide her SS#/tax id for our flexible childcare account. She attempted get around this by offering to take less. Apparently for her it would have meant she would have to draw less of her social security if she were working. So if we had gone with her and gone under the table we would have been helping her to commit social security fraud which I am not ok with! Also she argued that if we reported it on taxes she might have to get licensed. My response was that licensing boards exist to protect the public. So if she was going to make money by watching children full time she should get licensed and go through all of the paperwork & background check. It stunk because it caused some tension in the friendship but in the end it was definitely the right decision.

  17. bhn Dec 31 at 9:25 pm Reply Reply

    Yep, definitely do it above the table. Not only because it’s the right thing to do, and because it’s more professional, and because it benefits your nanny, but because it benefits you since you can then claim the childcare expenses against your income.

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