It’s in you best interest: In many cases you could lower your personal income taxes when you legally hire a household employee.  This can be done through a flexible spending plan (cafeteria plan) offered by most employers for child and dependent care expenses. The human resources department where you or your spouse works can provide you with specific plan details.  But typically, your employer can withhold up to $5,000 per year (per family) before taxes you can claim by submitting a form that your employer can provide (we can help filling it in if you have any questions).  If your marginal tax rate is 45% (state and federal) this equates to a $2,250 tax savings on your personal tax return.  Which based on the example provided (here) you would pay less in taxes then if your household employee is paid “under the table”.  Another potential option and most time not as beneficial as the dependent care option is the Child Care Credit available to many parents. This credit can directly reduce the parent's income taxes between $480 to $1,440 a year.

BEWARE: If a tax payer fails to report a household employee’s wages paid it will compromise the validity of there personal income tax return because the nanny tax is reported on your personal tax return, Form 1040.   This is something that you really don’t want to discuss with the IRS!!  The IRS has made it difficult to plead ignorance.  Getting caught paying "under the table" could result in charges of perjury or even tax evasion, not to mention huge penalties and interest and usually professional fees for an accountant and/or attorney.  It's just not worth the risk.

Keep in mind: There is no statue of limitations on the failure to report and remit federal payroll taxes.   Although you may think that the IRS, Social Security or your State/local Government will never find out because you are a one in ~250 million tax payers.  Consider when /if your former employee files for unemployment or social security benefits they will report you as an employer.  In that case employers can be required to pay back taxes (including the employees amount that you were required to withhold to begin with) penalties and interest charges, which will be on top of the perjury and tax evasion issues outlined above.  NOTE: If you want to atone for past discretions we can assist with the easiest and best option to pay any potential back tax obligations.  The option of waiting or denial is not really your best choice.

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