It is a moral dilemma that has significant financial and professional consequences.
Putting an employee on the books can up an employer's costs on her or him by between 10 percent and 40 percent, especially if the employer raises the salary to compensate for the nanny's hit from federal, state and local taxes, says Cliff Greenhouse, president of the New York employment agency Pavilion Agency and the Nanny Authority. His agencies make about 1,000 placements a year among wealthy families in New York, Florida, California, Illinois and Michigan and internationally.
Nonetheless, adds Greenhouse, "Families who do not pay their household staff legally are playing with fire. They are vulnerable on a number of levels. Instances of work-related injury, unemployment-insurance claims, wrongful-termination claims and overtime-compensation claims are a few examples of areas of exposure that can easily, and often do, open up huge cans of worms, resulting in huge penalties and, occasionally, criminal charges, too."
Fines can easily be into the thousands of dollars for even a shorter-term tax issue. Because there is no statute of limitations on violations, a long-standing issue can easily add up to big money.
Not only are the financial penalties steep, the professional consequences are great, too. If you're a political figure, for instance, a nanny payment problem could be very damaging to your career and even keep you out a position.
Even if you are not interested in a political or high profile governmental career, nanny issues can harm you. Lawyers could face disbarment and other career paths could be blocked by discovery of such a problem.
It just doesn't make sense not to pay your nanny according to the law. The key questions to ask are whether the worker makes more than $2,000 a year and whether they work exclusively for you. If the answer is yes to both of those questions, the employee must be treated as an employee for a company and treated as such with the Internal Revenue Service.
Consult your accountant on the rules within your state and make sure you are square with both the state and federal government. The piece of mind is well worth the savings of not complying with the law.