Know This – Before You Hire a Nanny: Tax Edition

Ready to hire a nanny?

Given the current parenting crisis, it might be the best decision you’ve ever made. But don’t make this one, major mistake.

This month, a California judge ordered Uber to consider all drivers employees, further illuminating the employee vs. independent contractor debate that has also affected the nanny industry. One of our Core Values as an agency, is to serve as advocates for nannies and we support any legislation that enforces the notion that nannies, too, deserve employment status. From the beginning, we have always employed all nannies and sitters on our Flex team despite the fact that it is far more expensive to do so. 

Instead of employing the part-time or occasional nanny or sitter, many agencies leave this responsibility up to the client who then has to keep track to ensure that the caregiver does not surpass the $2200 per year threshold, in which case, the family would be legally obligated to pay employer’s taxes. Even if the family doesn’t hire a nanny, but uses part-time babysitters for a few hours a week instead, the law still applies.
And the reality is that too many families using agencies that do not employ, don’t uphold the legal or financial responsibilities of employment. Sometimes families simply aren’t aware of all the ins and outs of household employment law. Other times, they blatantly ignore the law, hoping to hire a nanny and then pay her “under the table” so both parties can avoid the whole annoying tax thing. But there are a plethora of problems with this. 

Why It’s Important to Make Your Nanny An Employee

#1. Nannies miss out on unemployment insurance.   
COVID-19 wreaked havoc on many nannies and reinforced the importance of an agency-employed caregiver model that many agencies shy away from, sometimes to avoid the costs or hassle of employment. If agencies aren’t employing and leaving it up to the families and they are not employing, the end result is thousands and thousands of nannies lacking the many benefits of proper employment, including unemployment insurance.
In March, many families began laying off their nannies since they no longer felt safe having someone in their home or because their financial situation was so uncertain. This pandemic has resulted in many nannies unable to file for unemployment since no one was properly employing them and they were essentially left high and dry. 
#2. Both families AND nannies risk IRS trouble. 
Like it or not, taxes are a reality. Avoiding them puts families at risk. A nanny can report families by filling out a form on the IRS website. We have seen families end up in lawsuits because they did not fulfill their legal obligations to their household employees whether it was misclassification of staff as independent contractors or even failing to pay overtime.
While some nannies think that being paid in cash is more advantageous, this isn’t the case. Unreported income makes it hard to rent an apartment or finance a vehicle, for example, since wages cannot be verified. Plus, if a nanny files as an independent contractor, he or she will be double taxed, paying his or her portion of income tax and the self-employment tax. 
#3. Misclassifications rob nannies of overtime pay and other employment benefits
Nannies are legally entitled to minimum wage for every hour worked (no daily “flat rates!”), overtime pay for hours worked over 40 in a week, and other benefits such as paid sick leave in the state of Arizona. When nannies are not properly employed by either the agency or the family, they miss out on these important entitlements. 
#4. Family employers can’t claim childcare as a tax deduction. 
Unreported, “under-the-table” payments to babysitters and nannies cannot then be claimed at tax time for a deduction.
#5. Families trying to hire a nanny are going to have an increasingly difficult time finding a high-quality, child care professional who is willing to accept a position in which family employers aren’t willing to do things properly. There are just too many negative implications that nannies and sitters are becoming more aware of. Unfortunately, we meet many nannies who have been improperly classified as an independent contractor and given a 1099 (instead of a W2) by a family or even an agency. The financial ramifications of this are huge and it’s time for nannies to be treated as the professionals they are. 
If you want to hire a nanny but are worried about all the legal and financial responsibilities of employment or want to learn more about household employment laws, we refer families to HomeWork Solutions – a nanny tax and payroll service. 
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