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Tax Obligations
Employer Benefits

Being legal is not a choice; it’s the law. Fortunately, there are many benefits to paying an employee legally. Here’s a few:


Significant Tax Breaks

To lighten the burden that falls on working parents, Congress has enacted tax benefits for families through employer-provided dependent care assistance (Dependent Care Account) and the Tax Credit for Child or Dependent Care. However, these tax breaks are only available if the employee is paid legally, meaning all state and federal taxes are withheld and paid. We can advise you on the best tax break for you and how to take advantage of it.

Dependent Care Account. Many companies allow employees with child or dependent care expenses to contribute up to $5,000 of their pretax earnings to an individual Dependent Care Account. The money in this account is then used to cover dependent care expenses, free of taxes.

Tax Credit. For those who don't have access to a Dependent Care Account, they can claim the Tax Credit for Child or Dependent Care on their income tax return at year-end. Basically, they can take a tax credit of 20% to 35% of qualifying childcare expenses. But only expenses of up to $3,000 for one dependent or up to $6,000 for two or more dependents can be counted.

Only one of these tax savings options may be used each year. The Dependent Care Account usually provides the greater tax savings. Oftentimes, the tax savings exceed the employer's share of the taxes, actually saving money by being legal!


An Example: A family in Boston hires a nanny to care for their children. She earns $1,600 per month. The family contributes the maximum $5,000 per year to their dependent care account at work. This account provides a tax savings of about $2,250 per year, based on a 45% marginal tax rate. The employer's portion of the taxes amounts to about $1,750 per year, so the employer saves about $500 simply by paying his/her employee legally!

 Health Insurance

Many household employers offer health insurance to their employees.  This is a wonderful tax benefit for both employer and employee, as any payments made towards health insurance are not considered taxable wages.   You can pay the healthcare premium directly to the health insurance company or pay the premium to the employee for her/him to pay to the health insurance company.  If you pay the premium to the employee, keep a copy of a current health insurance card on file for proof of the policy.

An Example: A family in Texas offers a nanny $1550 per month, which includes a medical plan. The medical plan costs $125 per month. The family reduces the monthly payroll to $1425 and writes a check for the $125 premium each month from their own bank account. Both nanny and family save the taxes on the $125 monthly medical premium.

It’s Just Not Worth the Risk.

The IRS has made it much more difficult to plead ignorance of the law. As of 1995, federal household employment taxes are reported on Form 1040. Now, getting caught paying "under the table" could result in charges of perjury or even tax evasion, not to mention huge penalties and interest. It's just not worth the risk.

An Example: A nanny in New York worked for a family for two years until the children went to school. The nanny was between jobs for a few months and filed for unemployment benefits. However, the family never paid their federal and state unemployment insurance. The nanny did not receive any unemployment benefits and the family "got caught." They had to pay thousands of dollars in back taxes, penalties and interest.

Peace of Mind

Being legal can actually save you money, our services make it hassle-free, and it provides your household employee with the benefits she/he deserves. According to Monica Frei Jenkins, owner of Town and Country Resources in Palo Alto, CA and household employer: "Paying "off the books" is too risky and it doesn’t send the right message to the caregiver. If you really respect them, and they are taking care of the most important people in your lives, I think it’s fair to give them all the benefits that they deserve, to pay them legally, and to care about their future."


Employee Benefits

The benefits of being legal are numerous, and household employees really can’t afford to be without them. Once you take a look at the benefits, you’ll agree that the benefits of being legal far outweigh the cost of a slightly smaller paycheck! 


Employment History
Being legal creates an employment history that is critical to daily life. If your employment is not documented, it is as if you do not work. An employment history is required for a car loan, a mortgage, a student loan, a credit card application, a health insurance application, an auto insurance application, future job applications, and the list goes on…

An Example. A nanny in Washington worked for a family for five years and was paid illegally. Her car broke down and she had to buy a new one. However, because employment taxes had not been paid, the nanny could not provide proof of employment for the car loan!

 Unemployment Insurance
When paid legally, you are entitled to receive approximately 50% of your salary for up to six months if you lose your job due to no fault of your own. This benefit is free to you, as your employer pays the cost of the program.

An Example. Jane lost her $450 per week job as a nanny when her family had a job-related move across the country. Jane receives $225 per week in unemployment insurance benefits while she looks for a new job. Assuming it takes her the maximum 6 months to find a new job, she will receive $5,850 in total benefits.

 Social Security/Medicare Benefits
For many, taking advantage of these benefits is years away, but consider these tax withholdings as a good investment.

An Example. Barb earns approximately $20,000 per year. During her career she contributes about $38,000 to Social Security. At age 65, she will receive approximately $175,000 in Social Security benefits during retirement, assuming she lives until age 85. That’s almost 400% more than the amount she contributed during her working years!

Disability Benefits
In many states, employees pay State Disability Insurance as a part of the taxes withheld. If you must take time away from work due to non-occupational illness or maternity leave, you are entitled to benefits while you are away from work.

An Example. Maria is a full-time household employee and is expecting a baby. Maria is planning to take several weeks maternity leave. Her employer plans to hire a temporary caregiver while she is away and cannot afford to pay Maria during her leave. Maria plans to file for disability benefits to assist her during maternity leave.

 Earned Income Credit
Employees may be able to receive the Earned Income Credit (EIC), which can eliminate some or even all federal taxes owed. The EIC is available to employees who have at least one qualifying child and expect to earn less than $33,030 in 2005.  A qualifying child is a dependent under 19, or under 24 if they are a full-time student.

Form W-5 provides specific instructions for determining if an employee qualifies.

An Example. Jackie earns $1,200/month as a household employee and has two children, ages 15 and 17. Jackie is eligible for the Earned Income Credit since she has two qualifying children and her annual income is less than $33,030.  Her employer withheld $1,102 in FICA and $275 in federal income taxes during the year.  However, she is entitled to an EIC of about $3,800, which offsets all of her taxes and provides her with over $2,400 extra! In other words, she will take home over $2,400 more than if she had been paid cash illegally!

For More Information, please visit the Breedlove and Associates website: 



 

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