Evidently, the new household taxing regime -- inspired by the infamous "Zoe Baird episode" in which President Clinton's choice for Attorney General confessed that she did not pay taxes on her nanny and was promptly dumped from consideration to the cabinet post -- hasn't made much of an impact on the number of people willing to pay those taxes. With an unofficial estimate that of 75,000 live-in nannies in the U.S., only 20 percent of their employers pay their household taxes, an April 21, 1996 New York Times article reported that accountants claim they saw no significant increase in the number of clients paying domestic employment taxes in 1995.
Thus, many taxpayers probably lied on line 53 of Form 1040, which for the first time asks about household employment taxes. The Times article on the subject quotes the IRS national director of specialty taxes as being "really disappointed" and having "a hard time rationalizing" why a lot more people are not paying their household taxes with the new one-payment system. Apparently this new law is breeding contempt for, rather than compliance with, our tax system. Attempting to tax an established part of the underground economy is proving difficult.
Why are nanny employers so reluctant to pay these taxes? While the Federal system may be simpler, taxpayers complain that many of the state systems remain complicated. Besides desiring to avoid the hassle, domestic employers and their employees also claim that they cannot afford the increased cost of compliance. In addition, many employers have illegal child care providers that they fear may be deported if they pay the tax.
Although the Times article points out that well-to-do families with large staffs appear to be the most obedient, the biggest complaint among many employers who are not so well-to-do is the increased cost burden. Their child care providers often share this lament. While some nannies prefer to pay more now to be protected later with social security and Medicare benefits, many others would rather not pay taxes when they are already struggling to support themselves with their earnings. Donna Esposito, an accountant in the Phoenix, Arizona office of American Express Tax and Business Services, points out that some nannies over age 55 collect social security and can only earn a limited amount of income or they will lose their social security. These nannies often prefer not to report their earnings from baby-sitting.
This is an outcome that only Jesse Helms and his band of right-wingers (the "woman stay at home, barefoot and pregnant" brigade) would love. For mothers who wish to enter the work force, the decision can be exasperating: They may want to work to help increase the family's standard of living, but the increased costs imposed by the tax laws, as well as decent quality child care expenses, can make it practically futile to work at all, no matter how much the family needs the additional income.
Working mothers are repeatedly penalized by our tax system. Esposito notes that one of the unfair penalties to working mothers is the social security tax. If you are a married couple and you are both employed, you may pay double the amount into the system that you would pay if only one spouse worked, but the likelihood is that you will not collect any more than you would have if only one spouse worked. You cannot collect social security until your are age 62. When one spouse dies, you can only collect one of the social security payments (the higher of the two). In other words, if your spouse dies, you will only be entitled to collect what you would have collected if you had never worked.
For example, A and B are married. A is employed and B is not employed. A made $61,200 per year and paid $3,794.40 per year into social security, not including Medicare. A's employer matched A's contribution, bringing the total contribution to over $7,500 per year. A dies. B can collect A's social security when A dies. On the other hand, C and D are both employed, paying $15,000 a year into the system. When C dies, D can only collect one social security payment. C and D paid double, but D will collect the same amount as the couple who paid in half as much.
In addition to accepting the unfairness of the social security tax, working mothers must also find and pay for decent quality child care, the biggest expense of working parents of all incomes, after food, housing and taxes. Just how much more does it cost to comply with taxes required for domestic employees? Generally, an employer pays half of the nanny's Medicare and Social Security benefit, which is 7.65 percent of her annual salary. The employee pays the other 7.65 percent. Many household employees are unable to pay their share, forcing those who want to comply with household employment taxes to pay the entire contribution of 15.3 percent. However, if the employer pays the nanny's share, that amount will be deemed taxable compensation, increasing the amount owed on the nanny's taxable income.
A business owner can deduct his or her employee's salary from his or her earnings as an ordinary and necessary business expense. But child care, which is usually a necessary expense for mothers to work, is not deductible from the mother's earnings. Instead, working mothers get a minuscule child care credit that doesn't come close to making up for child care expenses. The IRS only considers the first $2,400 of expenses per year per child, ($200 per month) up to a maximum of two children. The credit is 20 to 30 percent of that number. The more money your make, the less credit you get. If you get a 20 percent credit for one child, your credit would be only $480 per year. The average estimated taxpayer credit of $435 for 1994 clearly failed to provide any worthwhile relief for working mothers required to pay child care expenses in order to work.
The average cost of professional day care can range from $5,000 to $8,000 a year, depending on geographic location and the age of the children, and multiplied by the number of your children requiring care. The average nanny salary in the New York metropolitan area is $300 per week. Many families prefer the flexibility and the consistent, individualized and nurturing care in their own homes that a nanny can provide, and believe that this type of quality, in-home care should not be a privilege that only the well-to-do can afford.
In Zoe Baird's case, she, like so many concerned mothers, risked breaking the law by hiring an illegal alien, rather than using an unqualified, potentially dangerous person to care for her child. Given this choice, most responsible mothers would choose the best provider, rather than risk harm to their children. Although the IRS has a procedure for submitting taxes for illegal aliens, domestic employers often complain that the only way they could find competent child care was to hire illegal aliens, and they will not pay taxes because they fear their nannies will be deported. These taxpayers state that they don't want to risk losing an affordable, live-in child care provider who is nurturing and happy with her work.
Most IRS enforcement comes through regular audits, but the Times article admits that they may resort to other tactics, such as obtaining lists of clients from child care agencies. As unfair as the burdens to working mothers may seem, apparently many politicians and the IRS don't understand why mothers should object to the additional cost of household employment taxes. Add to this cost burden the fact that full time working women still earn only 72 cents for every dollar earned by men, and the reality that white males hold 95 percent of senior management positions, and the message becomes loud and clear: either don't get married and have children, or stay home where you belong. If you choose to work, pay your taxes and stop whining. Failing to pay household employment taxes for your child care provider will subject you to punishment for perjury, as well as assessments for back taxes and penalties of up to one-fifth of the amount owed.
If your child care worker is part-time, you could treat worker as an independent contractor rather than as an employee. This Website contains several articles on this issue: 94 Began New Ways to Pay Taxes on Household Help and Nannygate Revisited. Unfortunately, the liberalized federal laws regarding independent contractors might not work with state taxing authorities.
A Boston Foundation study recognized that "for moderate-income families, child care costs can swamp dreams of going back to school, home ownership, or saving for college." Do the tax burdens mean that more women will give up and stay home? Not according to most statistics. Tax policies should convey the message that if you are married and have children, it is O.K. to work to supplement your family's income. Tax policies should also give mothers wide latitude in finding the best possible care for their children, a task that is challenging even without IRS interference.
| Home Page | Search | E-mail Form | Firm Profile |
**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**