8 Convincing Reasons to Catch Up on Back Wages and Nanny Taxes Now
It's common for household employers to pay nannies, housekeepers and caregivers under the table. Some domestic employees ask to be paid under the table, and many domestic employers are unaware of the tax laws. However, employers are held fully responsible for the tax laws, not the employee. It’s on the employer to pay correctly and legally.
All employees can file for unemployment regardless of whether they were being paid legally. It doesn’t matter if your employee works for other families or is part-time. Employees can also file for social security benefits years later, as there’s no statute of limitations on domestic employment taxes. Household employers will be responsible for fixing the situation and will have to deal with the IRS and state tax agencies. Even worse, it’s tax fraud, which is a felony.
What to do? Pay the taxes.
Nest Payroll has helped many families file and pay retroactively for back taxes based on the wages they paid under the table. Even though it’s called the nanny tax, it is for any household employee, like housekeepers or caregivers.
It’s never too late to pay your nanny legally.
Why it’s worth it to fix those back wages.
You'll become tax compliant and will have the documentation to prove it, avoiding the time, hassle and stress of dealing with legal issues. Any employee, whether paid legally or not or with a valid SSN or not, can make a claim for unemployment.
You’ll help avoid audits, increased tax penalties and tax fraud charges.
You may be eligible for a tax credit with the Dependent Care Tax Credit through the IRS if you hired a nanny/caregiver so you could work.
You are an attorney, doctor, government employee, high-level employee or licensed to work in the regulated finance industry, and it’s critical to stay above board. A tax fraud conviction can threaten careers.
You elected to use a pre-tax FSA (Financial Spending Account) for dependent care through your company. You need to pay legally to be reimbursed from your FSA.
Your employee will have verifiable income for basics like applying for a loan or renting an apartment.
Your employee will have the safety nets that come with paying taxes: Unemployment, Social Security and Medicare credits, and in some states disability and paid family leave benefits.
You can contribute to your employee’s health insurance premium as a tax-free boost to your employee's wages, which helps both of you save money (Nest Payroll makes this easy). Typical employer contributions we're seeing range from $50 to $200 each month.
What are the expected tax costs to catch up on the nanny tax?
Employer payroll taxes are normally about 10% of wages. If you hired a nanny or caregiver so you can work, you'll offset those taxes quite a bit. When you catch-up, your employer tax will be higher, roughly 16%, because the employer is required to pay both employer + employee social security and Medicare and both sides of state taxes too (where applicable) because you didn’t withhold them. Income taxes are not the responsibility of household employers and are thus not part of catch-up.
Your household employee may qualify for tax credits like the earned income tax credit (EITC), child tax credit and others. If the employee has already filed their taxes this year, it’s straightforward to file an amendment so they can get the benefits that come with the new W-2.
What about penalties? The IRS may give you a break if this is the first year you owe taxes on a household employee. Try to pay the taxes by the time you file your personal taxes in April. However, your state might assess a late penalty for not paying on time. We have seen penalties range from $150/quarter to as little as $15/quarter, depending on the state.
Here’s a high-level example:
Wages paid under the table during 2023: $15,000
Employer tax (federal + state): $1,147.50
Employee tax (federal and state not withheld) paid by employer: $1,283.72
Total employer tax 16.2%: 2,431.22
When you input your catch-up wages into Nest Payroll, you’ll get a tax summary right away. You can decide if you want to move forward or cancel it.