Here's How to Be Sure You're within the Law
Regardless of how your nanny refers to herself, how you define her status in an employment contract, or whether she is paid hourly or is salaried, it is the law that determines who is and who is not an "employee" - and thus subject to legal and tax requirements.
Many people believe that as long as a nanny doesn’t turn her employer in herself, the employer will never get caught hiring someone illegally. Recent history, and the criminal courts, are littered with people laboring under this misconception.
By Robert E. King, Esq.
You've done all your research and you've decided that of all your childcare options, hiring a nanny is the best choice for your family. So you ask around and find a reputable nanny agency, go through an extensive screening and interviewing process to select just the perfect person to care for your child, and you hire her. All of a sudden, you're a household employer - with all the legal, tax and insurance implications that brings. Now what?
Nannies As Employees
"Yikes," you may be thinking. "That sounds complicated. Can't I just call my nanny an independent contractor and make life a lot easier?"
In most cases, the answer is "no."
The question of whether a nanny is an "employee" or an "independent contractor" is one that can sometimes have gray areas, but in almost all cases under both federal and state law, nannies are "employees."
There are several legal criteria used to determine a nanny's employment status:
- Economic Reality Test - Is this the nanny's only job? Even if it's not, does she rely on this specific job for a considerable amount of her income? Is her financial livelihood entirely or largely dependent on this job? If the answer is "yes" to any of these questions, then she's almost certainly an employee.
- Amount of Control - Another factor in whether a person is an employee centers on the issue of control. If you exercise control over how the person does his or her job in your own home - and in almost every case you would exercise such control over how your nanny interacts with your child - then you likely have an employee, not an independent contractor.
- Regular and Substantial Hours - The more regularly a nanny works for a family, the stronger the case that she is an employee. It is when her hours are minimal and/or fluctuate from week to week (or month to month) that she is more likely to be considered an independent contractor.
The important thing to remember is that it's the law that determines who is and who is not an employee. How the nanny refers to herself, how you define her status in an employment contract, or whether she is paid hourly or is salaried do not necessarily matter in determining her employee status.
Although there are limited exceptions to the employee definition for certain family members or if you take your child to another person's home for care, the general rule is that if you control how she performs her duties in your home, she is your employee and you are required to pay employment taxes for her work. Bear in mind that these tests can be applied to other household employees as well, such as elder care providers.
Paying Taxes Is Not Optional
So here's the part you were afraid of when you first thought about hiring a nanny: paying employment taxes. The bad news is that it's not optional. The good news is there are legal and tax advantages to paying your nanny legally that can offset much of the added cost.
If eligible, you may be able to maximize your tax savings in a number of ways, including:
- Saving 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 percent for the first $3,000 in qualifying expenses for each of your first two children per year.
The bottom line is that if you maximize your tax savings, paying legally can amount to as little as 5 percent more than paying your nanny under the table, and you avoid the potentially devastating charges, penalties and other costs of tax fraud.
But Who Really Gets Caught?
When people make the conscious decision to pay their nanny under the table, there are assuredly several factors that go into that decision. One is the aforementioned misperception that the cost differential will be too much of a burden to bear. Another is difficulty believing that they'd ever get caught. Yet people get caught every day. And you don't have to be a judicial or political appointee to feel the sting.
You'd be amazed at the ways people have gotten caught. In some cases, it was a simple mistake that led to someone being found out, but it's never a simple thing to make it right.
Many people believe that as long as a nanny doesn't turn her employer in herself, the employer will never get caught hiring someone illegally. Recent history, and the criminal courts, are littered with people laboring under this misconception.
Often, when someone is caught, it's unintentional. Say your household employee files for unemployment, social security, disability or worker's compensation benefits. Oops! You've just gotten caught not paying her employment taxes.
Or it could be entirely intentional: your employee quits or you fire her, and she turns you in - or tries to blackmail you. Or a disgruntled neighbor reports you.
Under any of these scenarios, the result is the same: You get caught and face considerable consequences. And what are the consequences of paying illegally? They can include:
- paying all back taxes, penalties and interest
- charges of perjury and tax fraud
- up to $250,000 in fines and up to 5 years imprisonment
- ruining your reputation and career (for example, an attorney being disbarred)
OK, Now What Do I Do?
All right, we've established that being a household employer can be daunting, but you also can see that it's not worth the risk of not doing it right. Yet, as with many things, you don't know what you don't know, and in the case of household employment, that can get you into trouble.
For example, overtime laws vary by state and sometimes even by municipality, and nannies and other household workers are often treated very differently than other types of employees. So don't assume that because you understand federal and state overtime regulations and other employment laws for the company where you work that those automatically apply to your nanny.
Fortunately, there are resources available to help. My company, Legally Nanny®, and others help families set up their household employees legally and educate them on their obligations going forward. Once you've got those things under your belt, you'll be pleasantly surprised at how simple the ongoing tasks of being a household employer can be.
Most important, don't forget to enjoy the benefits of hiring your nanny - she's there to care for the most precious people in your life, after all!
Put It In Writing!
Because your nanny is in your home and is involved with some of your most personal business, there is a danger of treating the relationship more casually than the professional employer-employee relationship it is.
You've probably put a great deal of thought into the specifics of how you expect your nanny to care for your children. From feedings to nap schedules to desired activities, you know how you want things to be done. Now, you have to do the most important part: make sure your nanny understands your expectations completely.
The more specific you can be, the more smoothly things are likely to go. This is where employment agreements can be invaluable, so that there are no unpleasant surprises on either side. Shared expectations are critical and, as with most things in life, the devil is in the details.
Some things to consider articulating in your employment agreement:
- job duties
- work hours
- compensation, including pay days
- vacation or sick hours - how many, how they accrue
- privacy and confidentiality
No matter how you choose to handle each of these items, the important thing is to put it in writing.