It’s not easy being a household employer. For some, the legal, tax, and insurance issues make paying their employees “under the table” seem easier and cheaper. But this decision can be penny-wise and pound-foolish if you get caught. Even if you don’t get caught, you’ll be missing out on legal and tax advantages that you can’t use if you’re paying illegally.
Make no mistake, getting caught paying someone “under the table” is easier than you think. For example, if your household employee files for unemployment, social security, disability, or workers compensation benefits, you’ll likely get caught for not paying her employment taxes.
And what are the consequences of paying illegally? They can include:
charges of perjury and tax fraud
up to $250,000 in fines and up to 5 years imprisonment
ruining your reputation and career
But there are advantages to hiring and paying nannies, elder care providers, and other domestic employees legally! If eligible, you may be able to maximize your tax savings in a number of ways, including:
Save taxes by putting up to $5,000 pre-tax per family per year into a Dependent Care Account to help pay for your nanny.
Eligibility for the federal Child and Dependent Care Tax Credit for a minimum tax credit of 20% for the first $3,000 in qualifying expenses for each of your first two children per year.
In addition to these potential tax savings, another advantage to paying legally is your peace of mind. Don’t underestimate how worrying about getting caught and the consequences of hiring illegally can take a toll on you personally and professionally.
After maximizing your potential tax advantages, paying a nanny legally can add as little as 4% to your cost. On a $20,000 annual salary, that’s roughly an additional $800, a small price to pay for the peace of mind that comes along with paying legally. Regardless, the significant consequences of getting caught mean that it’s just not worth the risk of paying under the table.
