I have a cousin (in the US) who has been paying a friend to babysit fairly frequently. This has apparently involved a lot of hours and he has paid her about $15,000 this year. She has asked him if he would refrain from reporting the payments to the IRS so she doesn’t have to pay taxes on them. Now obviously the babysitter could get into trouble for failing to report income. But what penalties might my cousin face if he fails to report this? And what are the chances that the IRS would find out? It’s hard for me to imagine how they might find out, unless they audit one of them for some other reason.
Failing to pay taxes is tax fraud, with all the potential civil and criminal penalties associated with engaging in such activities. Note that employers also must pay taxes, not just employees. Common employer taxes for those who hire domestic workers include:
- Unemployment insurance taxes
- Social security taxes (employers also pay 6.2% of the employees’ gross wages)
- Medicare taxes (again, employers also match the 1.45% tax that employees pay)
Your cousin should file appropriately and pay his taxes, issue an annual W-2, and all the rest. There are companies that specialize in doing payroll for employers of domestic workers if your cousin don’t want to bother with all the paperwork.
Yeah, whoa. Her asking the question makes clear she understands the law to some extent. And now if he doesn’t pay her he’s an accessory to fraud.
The IRS doesn’t really give a damn about paying $20 to some neighborhood kid to watch your kids for an evening or to mow your lawn. But it does care if it starts looking like a business.
As for the potential penalties? Could be fines. Could be loss of a cabinet level position at some point in the future.
She’s paying with cash, right?
Do I Have to Pay ‘Nanny Tax’ on a Babysitter?
Note the article is from 2014
Wait…$15,000?!! Is that a typo? If your cousin is actually paying someone $15,000 a year, he’s not “paying a friend to babysit”, he’s employing a professional nanny. That’s the annual gross income of a 40-hour a week, minimum wage job, almost to the dollar.
Technically, paying for childcare services in your home establishes the worker as a employee for tax purposes, in many cases. It’s just that if you pay less than $2100/year in gross wages (2018 threshold), you aren’t required as an employer to do all the tax filings.
There are some cases where it can be shown that the worker is actually an independent contractor. In such cases, as an employer you can just issue your worker a 1099 instead of a W-2, and the worker can deal with the tax implications by themselves.
Yeah. I mean even if you went slightly over the reporting limits, as long as you didn’t realize you did, then you’d be OK. But in this cases, it is way over and both sides know. Gotta file.
Agree that a 1099 is likely more appropriate than a W-2, which means you’re the employer versus having hired someone as contractor. AFAIK, you as the employer are liable if you don’t file a W-2, but filing a 1099 places all the burden on the contractor. The worst that would happen is you’d receive a letter from the IRS saying you can’t do business with the contractor if taxes aren’t paid by him/her. I’ve seen some of these letters and we had to suspend working with the person/company until they settled with the IRS.
Also, if you fail to file either a W-2 or 1099, you may be held liable for tax fraud.
You do NOT issue a 1099 to your babysitter, except in the unlikely case that you are paying your babysitter as part of your trade or business. (Enabling you to go to work, for example, is a personal expense, not a business expense.)
I know that is a common belief, circulated on the web, that you should issue a 1099 to your household employees in various circumstances, but this is simply not true. You will not find anything from the IRS saying you should do so.
There are two problems with your “Agree that a 1099 is likely more appropriate than a W-2…”:
(a) You never issue a 1099 for personal expenditures.
(b) It’s not up to you to decide whether you would rather issue a 1099 or W-2. The rules on household employees are very strict: If they work in your house and you control what they do, they are your employee. If you pay them more than a certain amount, payroll taxes and a W-2 are required.
Please refer to IRS Publication 926, Household Employer’s Tax Guide.
Regardless of what he does, this discussion should have taken place before she started babysitting. Some people use pre-tax FSAs/HSAs to pay for childcare or they may qualify for child care credit, which would require them to report it.
Many, many people pay for all sorts of things, including childcare, “under the table.” It’s pretty low risk to not report it, but your friend could be that small percentage that gets caught.
I think people get hung up on this 1099 vs W2 issue for certain services because they know there are certain circumstances where you need not issue a W2 to a childcare provider and they assume that in those cases you issue a 1099. Nope- in those cases you issue nothing. A person who cares for only your child in your home is an employee. If they care for your child elsewhere, and potentially also care for other people’s children that person is not your employee. So when Annie watches your children in your home, she’s an employee. When Patty cares for your child and children from two other families in her home, she’s running a day care center ( licensed or not) and you no more give her a W2 or 1099 than you would issue one of those documents to Kindercare.
heres a person looking for that type of sitter sort of …
While I agree with what’s been said, I’m curious about how the IRS would catch the employer, even with an audit. Over the course of a year I spend a substantial amount of money on drinking and dining, almost all of which is cash. The amount could easily reach $15,000.
How would an IRS audit differentiate 15K in cash spent in restaurants and bars vs the same amount paid to a babysitter?
If the arrangement ends unsatisfactorily and the employee files for worker’s comp, or unemployment, or wage theft (not realizing that it could result in their own fraud also being reported), those other agencies might report the situation to the IRS.
Ahh, ok, I see.
You can also be done for abetting benefits fraud, as happened to our neighbors. Ironically he was a lawyer and a member of the state legislature. She was an employee of the State Auditor!
The cousin bears no legal liability just because someone else decides not to pay their taxes. In fact, he’s doing the IRS a favor because, by not declaring that 15 grand as a tax deduction, he is in fact paying more taxes than he should.
She needs to start paying taxes because, if she is caught, not only will she have to pay back all of the tax money she stole, she will have to pay some heavy penalties as well.
But the cousin hasn’t withheld, reported, and paid his portion as the employer. For my employees I have to file quarterly and pay “their” taxes along with my portion.