The employer is absolutely liable for not deducting and paying payroll taxes and for not filing and issuing W-2s.
At least in our case, some years ago now, there was little or no deduction or credit available. And we had to fork over 15.3% as payroll taxes. Actually we only had to pay 7.65%, we chose to pay both parts of FICA/Medicare to relieve some burden off the nanny.
What if you pay a child care agency? That agency is a hired service, and you can certainly tell that agency that you require a qualified employee capable X, Y, and Z to be present at certain hours. You don’t have to issue either a 1099 or a W2 to a paid agency.
Now, if that agency happens to be a sole proprietorship with only a single employee, that puts the burden back on that agency to address all of its tax issues.
I would like to add something extra onto this:
A friend was being a nanny for a family’s 2 kids while the parents were on a 2 week vacation. Now I dont totally understand the details but either he was self employed or owned a business but regardless, he treated her as a contractor and thus filed on her. She didnt know this until the end of the year came and she got this big tax statement. Then she suddenly had to write this big check.
She was mad he had not told her nor did he tell the nanny service he was going to do that. If he had, they would have renegotiated the fee and paid taxes at the time of service.
You cannot wriggle our of being either and employee or employer for tax purposes by corporate form. It is determined by the facts and circumstances, primarily the nature of work, location, hours set, existence of other clients, etc. Whether you are incorporated or not is almost irrelevant.
Assuming that you were going to be paid under the table isn’t a very good defense.
It comes up every now and then when a person who owns a business pays the person thru the business instead of privately. They make the person either an employee of the business or pay them as a contractor. Both are ok as long as they tell the nanny/babysitter ahead of time.
The other issue is that the sitter is losing out of social security quarters by not having reported income in those quarters. Since how much you get out of social security is a factor of how many quarters you have put into social security - and how much you made during those quarters, this could reduce the size of her check later on.
I’ve heard that there’s an upcoming rule requiring people who take the child care allowance to list the social security number of the person providing child care. It’s been along time since I’ve required child care, so I didn’t listen too carefully. It would make not reporting child care income more difficult.
Correct.
A household worker might be due a 1099 in some specific circumstances, if they were clearly doing “contract” work where they have a great deal of control over how the work is done. If you had a gardener who had his own business, for example, that might qualify.
Speaking from somewhat outdated experience (we hired a nanny 22 years ago and employed her for 10+ years):
The frustrating thing about having a nanny and doing it all legally is there is a fair bit of paperwork. You have to file (and withhold taxes for) the federal government, most likely the state government, and unemployment. I would expect most places have a way to do the local and unemployment online - mine did (it’s 10+ years since we had a nanny); Social Security and Federal was less straightforward, paperwork-wise, but then SSA created an online tool where you could type in the numbers and it would generate a PDF of the W-2.
And of course before doing any of this I had to get EINs set up for the state and unemployment offices (they weren’t called EINs for the state and unemployment, that I recall, but I did have to set something up).
Employment insurance is interesting. I’ve mentioned here before that if you let an employee go, your rates can go up a LOT the following year - which I think is why some employers try to fight all unemployment claims (the bastids). Our rate varied from year to year despite having no claims - some years the rate was zero (I just had to file the paperwork online); other years I did have to pay but it was trivial - the most I paid was 56 bucks for a year.
The year after we let her go, though, our rate quadrupled. Had we hired another employee we’d have paid 200 dollars on the same salary.
As far as the Federal taxes go: you do withhold (unless she opts out) federal income taxes, and you withhold her share of social security (which you must match). You have to file with SSA separately - but the taxes themselves are paid as part of your income tax return if you so choose; you can certainly pay quarterly estimated payment, but we opted to bump our own withholding a bit to cover hers. Then when you file your own 1040, you attach a Schedule H (I think) detailing what you paid, what you withheld etc. and the withholding portion is added to your tax for the year.
I’ll add to all the people saying “that’s tax fraud” and note that it could also contribute to other sorts of fraud - such as public assistance. If the friend were being paid above the table, this might render her ineligible for all sorts of things. I suspect a big part of asking to be paid in cash is to keep the benefits coming.
As a side note: when we were first looking for childcare for Dweezil, 24+ years back, one in-home care place said we had to pay cash only. I’m quite sure the government never got any remuneration from that income. It was one of the reasons we didn’t place him there.
If you’re paying under the table, you’re not claiming any childcare credit. You have to have some sort of proof of the expense in case you get audited.
We did have to have our providers sign a receipt so I could file it with our pretax childcare account. At that point (and this was 10 to 24 years ago) I don’t think we had to get the SSN for that receipt - though of course had we been audited, or had the flex spending servicer been audited, the government probably could have used the info (name, address) to track the person down. So when we used an in-home provider, we never had her SSN. We did need it when we had the nanny.
We insisted on doing it all above the table for all the reasons others have cited: social security credit, unemployment availability, not going to jail… plus my mother was a tax accountant and had she thought we were cheating, she’d have given us bloody hell for it :D.
What Jasmine said re the employer not being liable is R.O.N.G. Wrong. The employer CAN get into trouble - because the law is quite clear on what is supposed to be done in this situation. The tax will probably NOT benefit the government in this scenario, though I don’t recall what the maximum credit / deduction is. Say the maximum you can deduct is 5,000 - and your tax rate is 28% - you’re getting a tax benefit of 1400 dollars if you deduct. If you pay the nanny 20,000 dollars, and FICA is 7.65% (I think that’s it, I could be wrong). That’s 1503 dollars due from the nanny and 1530 dollars from you. 1400 < 1530 so the government is losing money just on your part - and a LOT more money if they don’t get the nanny’s part as well - plus the nanny’s income tax itself (likely not much, at 20,000 a year).
To add to Mama Zappa’s post.
Trying to do everything by the book was not just tedious and expensive, it eliminated the first four or five otherwise “good” candidates for our kid’s nanny.
Actually we used a home payroll service, that made things a lot simpler. But of course that ramped up the cost even more.
We also decided that we would pay both the employer and employee side of FICA and Medicare. At least at the time (2008) there was some exception that you did not have to “gross up” the wages for taxes paid by a household employer.