Family Secret: More Parents Are Avoiding the Nanny Tax
A funny thing happened on the way to the Internet age: A lot of parents stopped paying the nanny tax.</br></br>Household-employment tax filings for nannies and other domestic workers fell 10% in the five years ended in 2006, based on the latest Internal Revenue Service data -- a period when the number of domestic employees actually rose, according to Labor Department data. Since 1996, filings are down 26%, to 225,441. Growth in online hiring, and the casual, cost-averse attitudes of parents who find their nannies on the Web, are among the causes, parents and industry sources say.</br></br>It's never wise to evade taxes, but the trend poses particular risks now. The slumping economy means more nannies are likely to be laid off and then file for unemployment benefits, drawing the scrutiny of tax regulators, attorneys say. Also, avoiding the taxes leaves nannies devoid of a safety net, including Medicare and Social Security benefits, in an era when they may need it more than ever.</br></br>Of course, paying nanny taxes is about as much fun as having a root canal. People who pay household workers more than $1,600 a year are required to file onerous paperwork to cover Social Security and Medicare taxes of 7.65% of gross pay; federal unemployment insurance of 0.8%; state unemployment insurance, usually of 2% to 4%, and other state and local taxes. The employee's share is another 7.65% for Social Security and Medicare, plus any state and local taxes. Many parents spend $30 to $70 a month to have a payroll service handle all the red tape.</br></br>In the past, parents more often hired full-time nannies through brick-and-mortar agencies, which often exerted arm-twisting to persuade both parents and nannies to pay taxes. Also, periodic derailings of presidential cabinet appointees over nanny-tax violations, including most recently failed Bush nominee Bernard Kerik in 2004, highlighted the hazards for scofflaws.