Should You Be Paying Taxes on Your Baby Sitter?

Jacoba Urist for the New York Times writes:  If you want to hear a pin drop, ask a room of parents whether they report employment taxes for their baby sitter or nanny. My (admittedly unscientific) conclusion, drawn from four years of Manhattan motherhood, is that many families do not. In a 2011 discussion of nanny compensation on Park Slope Parents, most families reported paying their caregivers completely off the books, while very few said they paid the tax. Susan Fox, founder of Park Slope Parents, suspects the off-the-books number among her readers is well over half.

For some reason, otherwise lovely and law-abiding citizens find nanny-tax withholding to be one of the most sensitive and perplexing household finance issues out there. When I was speaking recently at a legal workshop for parents, a pregnant woman raised her hand, and asked me rather incredulously, “Are we really expected to pay taxes on a nanny?”

Legally, the short answer is, “Yes.” It’s also the right thing to do, as parents who want to teach our kids to play by the rules, and as taxpayers who want to pull our weight in society. And don’t get too hung up on the word “nanny” either. You may be required to pay taxes on a person who you think is “only” a part-time or occasional baby sitter.

The longer answer, of course, is why so many parents choose to hunker down and hope that their tax return never gets flagged for an audit, or that their relationship with their nanny never sours.

In my experience, many parents feel the threshold for nanny tax responsibility is too low. And in a place like New York, where the going rate for a sitter is $18 to $20 per hour, that’s a pretty plausible perception. According to the I.R.S.’s Household Employer’s Tax Guide (or Publication 926) for 2013, any family that paid a household employee $1,800 in cash wages over the year is required to withhold Social Security and Medicare, and to match that withholding with an employer contribution. Additional unemployment and state taxes may also be due.

So some parents who pay a full-time caregiver’s salary perceive an acute unfairness in having to withhold for not only their full-time nanny, but also for a more casual sitter. And the whole thing starts to seem a little silly. It’s the kind of rule nobody is really meant to comply with fully anyway, and a tax law you can bend harmlessly. Even outside of big cities, at $12 an hour, about three Saturday “date nights” a month can make someone a household employee. Raising the dollar amount at which withholding kicks in to a more sensible level (say, $5,000) might actually lead to more compliance — by making the law seem more fair and reasonable.

Susan Tokayer is co-president of the International Nanny Association, a nonprofit umbrella organization for the in-home child-care industry thatcompiles annual salary and benefits data as reported by child-care providers.

“When it comes to nanny taxes, clients often say they feel they’re being double-taxed,” Tokayer said. “Here they are paying income taxes on their own earnings, paying their nanny’s salary from their after-tax income, and then they have to pay their nanny’s taxes.”

At the same time, parents who want to put a nanny on the books can’t always find a caregiver who’s willing to be paid legitimately. Despite the occasional sensationalistic story, 99 percent of nannies do not make six figures. For most of them, every dollar counts.

And the feeling is often mutual. In a world in which child care can cost as much as college, parents want to maximize their dollars too. If the nanny who seems like the best fit for their family can’t afford withholding, and the parents can’t afford to gross up her pay (without losing hours they need to be at work), many choose their family’s well-being over the I.R.S.

There’s also the issue of undocumented caregivers, which adds to the touchiness so many parents feel about nanny taxes.

But Professor Peter Markowitz, director of Cardozo School of Law’s immigration clinic in New York City, points out that a lot of undocumented workers do, in fact, comply with the tax law and file returns. A nanny without a green card or Social Security number can apply for an Individual Tax Payer Identification Number so she can pay her taxes, and an employer can withhold as if she were here legally. And while an undocumented caregiver may be extremely hesitant to put her name into the system, Professor Markowitz explains that the I.R.S. has every incentive not to be a gateway for the Department of Homeland Security, because the I.R.S. is just trying to create revenue.

In the final analysis, it’s most important to remember that withholding rules are designed to protect your nanny, by financing her Social Security and Medicare down the road — just as she tries to anticipate your child’s needs each and every day.