In my recent Nannygate post, about the danger you put yourself in just by the act of hiring a nanny, some people complained that the examples I used were people who were less than sympathetic. Because if you break the law and you're rich, that is not okay.
I could give the example that inspired this post, a lovely colleague of mine, but I feel it's not my place to do so.
Therefore, I will link to this article. It's about an average couple who tried to pay their nanny taxes and screwed it up multiple times in spite of expert advice, resulting in large fines, and ultimately resulted in them losing their nanny. They also mention Nancy Killefer, who had to withdraw from her nomination for chief performance officer due to an error in nanny taxes (she tried to pay but made a mistake). Their final words of advice are to use a daycare or hire a professional company to do your taxes.
In summary, people who don't pay under the table are triply screwed:
1) They have to go through an overly complicated process to figure out the taxes, essentially equivalent to that of a real company
2) This process is highly susceptible to error and therefore fines
3) There's a lower selection of nannies since many refuse to be paid this way and there are plenty of families happy to comply for the above two reasons
Please don't say this isn't an incredibly broken system.
The system could certainly be more transparent, that's true for sure. The reason many nannies refuse to be paid on the books is because most families fail to make up the difference in hourly wage that gets taken out for taxes. If you increase the hourly wage to make up the difference, you start talking about some serious money. My husband and I looked into a full time nanny for our daughter and I think the tab came to about 55-60K per year after taxes for 55 hours a week of care if you paid taxes on the nanny, compared with around 40-45K if we did not. This is why we opted for a combination of daycare + au pair.
ReplyDeleteAnyway, I agree that the system is pretty convoluted, but on the other hand, evading taxes is still a felony, and for the most part people aren't avoiding paying taxes because "it's just too hard." They are avoiding them because paying taxes is very expensive, and they think they will get away with not paying them.
"They are avoiding them because paying taxes is very expensive, and they think they will get away with not paying them."
DeleteI don't think that's entirely true (the first part) based on the people I've talked to. But yes, money is definitely a consideration. I mean, for me, as a resident, I lived in a tiny 2-bedroom apartment with no room for an au pair and together between me and my husband earned about $60K BEFORE taxes. No nearby family. Kind of limited our options.
Before you argue that there was "no room" in your 2 BR apt, I know of at least one resident couple who hired an au pair. They slept on a futon in the living room so that the au pair could have her own room. Maybe you weren't willing to do that, but some people are.
DeleteI hear you about the expense. Another couple I know (also residents) went with the 60K nanny option. My assumption was that they were either going into beaucoup credit card debt or they were getting family help.
Kids are expensive.
I suffer from insomnia which can be really severe at times, so sleeping in the living room on a futon would not have been a reasonable option. Not to mention my poor back on a futon.
DeleteYou don't need to justify your decision to me. I don't know that I'd be willing to sleep in the LR either. I was just pointing out that technically hiring an au pair wasn't "impossible" for you, it was just something that wasn't optimal for your lifestyle at the time.
DeleteHere are two things I learned from my company's CFO (who is a CPA): (a) Not even IRS employees understand the tax code and (b) your outcome will depend entirely on which IRS employee gets your case--and you have no control over who you get. So if someone tries to pay taxes for their nanny and screws up, it's a crapshoot as to whether they will be penalized. I'm sure there are also nannies who do not intend to report income and request payment under the table. I can imagine someone desperate for help going along with this. But what I find hypocritical about the tax code is that a company can hire a "consultant," deduct NOTHING, and just send a 1099 at the end of the year...and that's perfectly OK. The consultant is responsible for paying SSI, taxes, etc. Yet from what you say, you can't hire a nanny on that basis? Either you deduct her taxes (and risk IRS problems) or don't and risk a felony? Broken is an understatement.
ReplyDeleteI think if taxes were very simple to report, many more people would do it and that would simply become the norm. Unfortunately, it would probably mean ALL nannies would make less. But right now, people who do pay taxes have to compete with people who don't, and that drives up the cost.
Delete"Please don't say this isn't an incredibly broken system."
ReplyDeleteHas a single person said this is a good tax system?
Well, I'd say people saying that you're a criminal for not following it and don't deserve to hold a public office is definitely not an acknowledgement of how bad the system is.
DeleteGenerally people don't get in trouble with the IRS if they have made at least a good faith effort to follow the rules. I don't really care that it's "complicated" to pay nanny taxes. If someone running for public office didn't even try to pay, then that is a felony, and I wouldn't want them elected.
DeleteWhat Old MD Girl said.
DeleteI am not understanding something, Fizzy. We all seem to agree that childcare is expensive. We further agree that the tax code sucks. So here's where you lose me -- are you suggesting that those two things together justify illegally avoiding these taxes? And because some people do just that, it justifies your behavior if you were ever to do it? Because it sounds like it to me, and apparently to some of your other readers, as well.
Yes, that's what I'm saying. It may still be *illegal* to break a damaged law, but I don't think it's *immoral*. If it's an action that benefits your child and really causes minimal harm, I don't know how you could truly say it's immoral.
DeleteIt's like driving over the speed limit because if you don't, everyone around you does stupid and dangerous things to get around you. Illegal, but not immoral.
Not even close to a comparable situation. Nice try though.
DeleteBecause you say so, I guess.
DeleteBecause you are lucky enough to live in a country where you wouldn't get your a** tossed in prison for speaking out and trying to change "damaged" laws you don't like, but you'd rather just evade them and try to justify your actions.
DeleteThat doesn't even remotely explain why breaking unreasonable traffic laws is fine but unreasonable tax laws is not. Nice try though.
DeleteBecause the first, ironically enough because it requires breaking a law, has to do with public safety. The other does not.
DeleteFizzy just admit it: you just don't want to have to spend the money. This has nothing to do with morality. BTW, not paying your taxes is a felony. Speeding isn't even a misdemeanor. Most people agree that not paying your taxes is much worse than speeding.
DeleteSpeeding is way worse than cheating slightly on taxes. Speeding can KILL someone. I see people every day whose lives were destroyed by speeding. I have never seen one person whose life was destroyed by someone not paying nanny taxes.
Delete"Fizzy just admit it: you just don't want to have to spend the money"
For the tenth time, I do not have a nanny and never will. And it's a little disgusting how tiny a tax credit I get for my huge daycare bills.
You admitted that your speeding under those circumstances would be to PREVENT an accident. Stop trying to make the analogy. You are comparing apples and oranges. It doesn't work.
DeleteRight, much like paying (or not paying) nanny taxes, the fact that some people speed make it necessary for others to speed. If everybody went the speed limit, nobody would feel forced to speed to prevent an accident, and everybody would be safer.
DeleteNice try though!
Sweetie, we all know that you did have a nanny at one time, and that you did not pay taxes on her. And sorry, many people do think not paying your taxes is immoral as well as illegal. Further, you could lose your professional license. Are you sure it's prudent to blog about this?
DeleteSeriously, that's your threat? That I'm going to get in trouble for not having said I never paid taxes on a nanny I never said I had on an anonymous blog? Pardon me if I'm not shaking in my boots, sugar pie.
DeleteLook, I made a resolution that I wasn't going to get into pointless pissing contests with people on the internet, and I think we can agree this is a major fail. I don't know why you're acting this way, but I'm going to do us both a favor and delete all subsequent comments from you on this thread without replying. Go play with your daughter instead... it's a better use of your time, I promise.
HAHAHA I love your blog and this short 'series' about hiring a nanny. If that is not a first world problem, I am not sure what is.
ReplyDeleteBut seriously, where are the cartoons? ;)
"If that is not a first world problem, I am not sure what is."
DeleteWanting more cartoons? :)
It's really not *that* complicated to just pay the taxes. But if, like me, you're annoyed at having to spend the time figuring it out yourself, there are companies that essentially automate the process for you. Now, I literally open an app on my phone, punch in the number of hours to pay, and my nanny gets paid automatically by direct deposit, and I'm told how much I owe in taxes. The same service tells me when a given tax filing is due, how much I owe, and it generates the form to be filed. I think I spent more time typing this comment than I typically spend on payroll issues in any given month. Don't get me wrong, I am incredibly in favor of fewer taxes instead of more, and the level of regulation bothers the hell out of me. But none of that is an excuse for me not to pay, and it bothers me when other people don't do it. It bothers me much more when the people who don't bother are those who generally advocate for more people to pay more money in taxes (which I guess they're in favor of because they don't plan to pay them anyway). (And no, Fizzy, I'm not suggesting you're in either camp.)
ReplyDeleteI am not in favor of fewer taxes... I just get frustrated that the government makes everything so complicated. And it IS complicated. In general, we tend to overpay in taxes for that reason. Like we missed out on doing flex spending one year for daycare, so that was a big chunk of money. And I forgot to do medical flex spending when I was pregnant, so my whole huge deductible got taxed.
DeleteYou'd "overpay" more for a less complicated system, because less complicated is likely going to mean fewer deductions, and credits and a flatter system for determining how much is owed.
DeleteStill, and I obviously have no hard evidence of this, but I would bet my left leg that most people who don't pay are just trying to save money, on the backs of the system, those of us who do pay, and the nanny who gets screwed out of Social Security and Medicare benefits he or she is entitled to. "It's too hard" is a convenient excuse, but it's one I'm relatively unsympathetic to, given that the cost of the payroll service I use is relatively small, and keeps track of almost everything you need to keep track of.
Maybe this payroll thing is a new service most people don't know about?
DeleteI doubt we'd overpay more for a less complicated system. We only take the automatic deductions like the kids and one daycare credit. I wouldn't mind paying more for everything to be automatic, for my husband not to have to go to a freaking workshop to understand how to file his stipend taxes. And I got fined once bc my work somehow didn't deduct enough from paychecks.
"the nanny who gets screwed out of Social Security and Medicare benefits he or she is entitled to"
Actually, of the people I know, they all say their nannies were the ones who demanded to be paid under the table. So they can't be getting that screwed.
Not much of an excuse. I don't know if you're employed by someone or have your own practice, but if it's the former, try walking in to the HR department and "demanding" to be paid under the table. It would save you and the employer a lot of money, but I'm betting they're not going to be willing to do it. Willful failure to pay taxes is a felony, and they send people to prison for that all the time. I don't care how badly I need a nanny, I'm not risking prison to satisfy that particular demand.
DeleteAnd no, the payroll thing really isn't all that new. It's just that most people prefer not to pay the taxes, and "it's too hard" or "my nanny made me" sound a lot better than "I just don't feel like paying them."
In your last comment you mention the " the nanny who gets screwed out of Social Security and Medicare benefits he or she is entitled to" and in this one you say it "would save [the employee] a lot of money". So which is it? Good for the nanny or bad for the nanny? And you must see the difference between a huge corporation paying taxes on its employees versus a family who has a babysitter 4-5 hours per week (anything over $1800 per year). Makes me glad we have no social life so I don't have to worry about that.
DeleteIt's also worth mentioning that the fine Zoe Baird paid for getting caught was probably comparable to hiring a professional to do her taxes all those years. The government both has no interest in making it easy to pay these taxes nor in finding people who don't or giving them more than a slap on the wrist. So really, nobody is motivated or either side.
If you read the article I cited, this was from a credible professional who spent hours and hours on her taxes and still got fined in their attempts to pay these taxes. Killefer was an intelligent professional who also screwed up her honest attempts to pay taxes. So why were you so successful where all these other intelligent people failed? Honest question, no sarcasm intended.
Good question. The simple answer is that accountants, like everyone else, make mistakes from time to time (they get sued for malpractice, too). I've seen enough examples of accountants getting math wrong--badly wrong--to not trust them with my own taxes. It'd be like you saying "I'm pretty good at what I do, but sometimes I just screw up the medical part."
DeleteIf you're paying an accountant to do your taxes, and they can't figure out the nanny tax, you need a new accountant.
Sometimes (a lot of times, actually) the IRS is wrong, and people don't always feel inclined to challenge them.
I can't speak to what other people are doing wrong, though. I know otherwise intelligent people who claim not to be able to understand a lot of things that intelligent people should be able to figure out (technology springs immediately to mind as an example). If you start out saying "oh, this is too hard, I'll never figure it out," you'll probably find that to be a self-fulfilling prophecy.
I'm not a tax expert. So far I've managed just fine. My dad wasn't one, either--he was just a single dad who needed a nanny for us when we were kids. He paid the taxes filling everything out by hand, on his own. He grumbled about it--all the time, in fact--but he did it.
Even the writer of the article you link is complaining mostly about the cost of paying the tax, and not how hard it is. For federal unemployment insurance tax, though, there's only one payment "to miss"--the one you make a tax time with your 1040. If she's really referring to the IRS, then what she's admitting is that she didn't pay her federal unemployment insurance tax at all--that's more than "just missing a payment." If that's the case, I question her assertions about her diligence.
The worst part about it isn't really the IRS part, it's the state unemployment tax, at least here. The hardest part of that is the initial paperwork, and the fact that is not everyone is charged the same percentage, and you have to wait for the state to tell you how much yours is. Making it all the same is likely to cost the household employers more, though, so people probably wouldn't want that. (Or maybe they wouldn't care if they're blowing it off anyway).
For a lot of reasons, I can't afford to deal with the risk of what might happen if I were caught blowing off those taxes (in theory, that could include losing my professional license). For other people, they may decide it's worth the risk of not getting caught, and if they do, maybe they get fined, and maybe the government decides it isn't worth prosecuting for a wilful failure to pay taxes. I'm not interested in finding out whether I'm the kind of person the IRS would like to make an example of, though.
I've read that in general, the IRS only prosecutes higher profile people with an airtight case. They like to have a 100% conviction rate or else it looks bad for them and isn't worth it financially. Baird, for example, only ended up with a fine and was in a professional position to be eligible for appointment as attorney general even AFTER being caught. Yes, she missed out on it. But I'm sure any less high profile job would have been fine. I literally don't think there's been one case out of a non high profile person being punished with anything more than fines for nanny tax evasion.
DeletePractically, the worst that could happen is getting a 100% fine on what you didn't pay. That could end up being a lot of money for a full time nanny for many years. However, considering people are expected to pay taxes on a teenage babysitting costing $2000 per year, I can't imagine the fine on that would be enough to warrant the hassle of turning this person into an employee.
Yeah. I was worried about my background check so I was very careful to pay my domestic employee tax. I got a federal employee number, hired a professional to help me (also with other taxes) and sent the proper forms and payments in.
ReplyDeleteThree years of sending in the forms SEVEN times EACH to IRS and Social Security. Often I would get letters..."we received your stuff" then a letter a month later..."we have not received your stuff". My assets were frozen four times in the attempt to get ~$3,400 that I withheld and sent, each of the three years.
That was five years ago, and just last week I got the last letter saying I finally owed nothing on the last year I did it (2008).
I wouldn't do it again for anything. Under the table for me, hands down.
Well, how come you didn't just use that ultra-simple payroll service Geoff mentioned above? :)
DeleteYou really should. It even does direct deposit and stuff for the nanny, if they want it. I haven't mentioned it here because I don't want to get all spammy on your blog, though.
Delete