There’s been a lot in the news these days about parents that don’t pay the nanny tax. Whether it’s Nancy Killefer or Caroline Kennedy the outcry from many is loud and clear: If they can afford a nanny’s salary then why can’t they pay the nanny tax?!
It’s been my experience that approximately 80% of parents don’t pay taxes on their nanny’s salary. While this number is both approximate and assumed, after over 13 years experience assisting hundreds of parents through the process of choosing nannies for their children, I’ve come to understand this percentage very closely represents the reality.
So why don’t parents pay the nanny tax? Here are some obvious reasons:
- It reduces the pool of available applicants. Since this market is unlicensed and unregulated, many nannies do not have documentation to work legally in the U.S. Among them are women with many years of childcare experience and in queue for up to 10 years for their green card. Others are students on a student visa that disallows them to work. In addition, many nannies are used to receiving cash payment for their work and don’t want to report income. In either case, paying the nanny tax reduces the pool of nanny candidates.
- It can be cumbersome to set up and manage a nanny payroll account. Although there are both software programs and household employment tax services available that reduces the burden of setting up a nanny payroll, many parents find the process of hiring a candidate time-consuming enough. When it comes time to complete the process following the decision, they dismiss the importance of the payroll account and opt not to do it at all.
- It increases the cost of care. Again, since the market is unlicensed and unregulated – and that so many parents do not pay taxes on their nanny’s salary, nanny salaries are quoted in street-wise terms, i.e. as what she earns net per hour. For parents that pay taxes, they must increase the hourly wage by 10% and then pay another 10-14% to the Federal and State government to cover their part of FICA/SDI and employer taxes. This 10-14% can be recovered by taking up to $5,000 in pre-tax dollars to pay for childcare through a Dependent Care Assistance Plan from the parent’s employer –or taking a childcare tax credit.
- The IRS is lax about auditing parents for the nanny tax. The unfortunate reality is that the IRS has bigger fish to fry. There are many businesses and individuals earning large sums of income that defraud the IRS of its due taxes. It simply is not cost effective for the IRS to track parents that avoid the nanny tax.
The other reality is that many parents don’t realize they have responsibilities to the IRS when they hire a nanny. While this might seem “putting one’s head in the sand” when there’s so much discussion about nanny taxes in the media recently, most parents simply look the other way on this issue. Unless they’re planning to run for public office or are in a position where they are subject to public scrutiny, paying the nanny tax is not foremost on their mind. Hiring a nanny they can trust to do right by them and their child – and in a way that doesn’t break their family budget is utmost on their mind.
Alyce Desrosiers, LCSW
Childcare Specialist for Families and Nannies