What does it mean to pay your nanny under the table?
It’s an informal arrangement where an employer writes a check or gives cash to a nanny instead of using proper payroll. By doing so they avoid paying a payroll service, witholding taxes from the nanny, paying the employers share of medicare and social security (FICA), and paying unemployment insurance to the state and federal government.
Most people do this to save the hassle and save money on taxes (at least in the short term). The practice is illegal because an employer must pay their share of FICA (totalling 7.65%) , along with unemployment insurance (usually around 1%). In other words, it saves almost 10% for the employer. If audited, a taxpayer may be required to pay back taxes, the employees share of FICA, and potentially face fines and criminal charges for tax evasion.
- avoids nearly 10% in taxes
- avoids the expense and hassle of payroll
- illegal and exposes you to financial and criminal problems
But is the nanny our employee?
Your household may not be a business but in the eyes of the IRS, it’s very similar to one. In fact, the IRS offers this narrow definition of a household employee:
You have a household employee if you hired someone to do household work and that worker is your employee. The worker is your employee if you can control not only what work is done, but how it is done. If the worker is your employee, it doesn’t matter whether the work is full time or part time or that you hired the worker through an agency or from a list provided by an agency or association. It also doesn’t matter whether you pay the worker on an hourly, daily, or weekly basis, or by the job.
More detail can be found on IRS Publication 926.
What if the nanny is only part time?
If you them under $2,100 per year, you may not need to deal with FICA taxes.
But from $1,000 and up you’ll need to pay federal unemployment taxes. Confused? Maybe this IRS table will help: