help! clueless about taxes vs paying under the table for nanny

mandijmu

hi ladies,

 i was wondering if anyone could let me know some insight as to making the decision as to whether to pay a nanny under the table (and obviously more) versus taxing and how you even go about doing that?!  we're due with our first on 8/13 and thought we would be using an at-home daycare that would obviously include taxes and hence we would be able to claim daycare...but then our neighbor whose kids will be in elementary school and one in preschool offered to watch our baby which we were thrilled about...however, I am trying to figure out what to offer, how to do it logistically, etc (taxing/versus under the table and not being able to claim, etc).  any input would be GREATLY appreciated - apologies if I seem very naive about all of this!!

 

 

jen_jupiter

I thought you could just pay what you think is fair/what you two agree on, keeping in mind that your neighbor will have to claim it as income on her taxes and pay taxes on it at that time.

kamcfarlane

it's tax fraud to pay under the table. that made the decision pretty easy.

katydid2007

Is she watching the baby in your house or hers? If in your house, legally speaking, you need to pay her on the books as she is considered a household employee. That means you need to pay into social security for her and it also means that she may ask you to withhold income taxes as well (meaning you write a check to the IRS quarterly).  Also, depending on your state, you may need to pay unemployment insurance for her.  Some people do this on their own or they hire a service to take care of it for them which makes the process much easier.

If she is watching your LO in her home it is her business and she will have to take care tax issues herself. 

A number of people choose to pay their nannies under the table either because 1- it's cheaper or 2 - their nanny is illegal.  As to it being cheaper, that's not always the case. When you pay taxes on your nanny you can claim a deduction on your own federal income taxes.  Further, if your company has a childcare reimbursement account you can currently pay up to $5000 pre tax, which will also be a savings. There are a number of websites that explain this much better than I am so I encourage you to do some research.  The increased expense really comes into play because your nanny may demand a higher salary to offset her own tax liability. 

I live in the NYC area and I will tell you that it's estimated that about 80-90% of nannies are paid under the table. Largely, I think this is because so many of the nannies in this area are illegal. 

Personally, I think that this entire taxation business is BS. I think it's a penalty on working mothers and that this should all be handled via a 1099 but I don't think the IRS really cares what I think! 

 

financialdiva

kamcfarlane:

it's tax fraud to pay under the table. that made the decision pretty easy.

This!

And you should consult your accountant on the logistics of how to pay/remit. I will never understand why people come on the internet and ask for tax advice!

DallasHorn

Here's what it comes down to...if you want to use a dependent child care savings flex account, then regardless of who watches your kids, they must be doing it legally. The dependent care flex account is where money is deducted from your paycheck pre-tax and you can then submit your childcare expenses to get that money back. This year the maximum is $5K - so your taxable income is $5K less. If your neighbor is watching your kids and not claiming whatever you pay her as income, you can not submit those expenses for reimbursement.