Countdown to April 15: What You Need to Know About Paying Nanny Taxes

Our labor market has seen a shift toward the sharing economy model (think Uber), and many people are finding it easier (and cheaper) to hire workers directly as independent contractors— resulting in billions of dollars in lost tax revenue each year. Now the government is taking action putting CEOs (and their families) employing domestic workers under close scrutiny. Here are 5 issues you need know about.

1) Misclassification of Workers. If you pay your household employee more than $2,000 per year, they’re not an independent contractor in the eyes of the federal government. They’re a domestic employee—and the government is prepared to enforce this rule. High-net-worth individuals, such as CEOs and business owners, are common targets for audits. In 2015, Wage and Hour Division investigations into misclassified workers resulted in more than $74 million in back-wage payments for more than 102,000 nationwide workers. Those payments, in addition to penalties and interest, were coming out of the employer’s pockets.

2) Domestic Workers Bill of Rights. Unions have done a great job educating workers about the Domestic Workers Bill of Rights. Not only do misclassified independent contractors pay more taxes than employees, they’re often deprived of minimum wage, overtime pay, workers’ compensation and unemployment insurance. You value your domestic workers, and they should be treated no differently than regular employees when it comes to taxes.

3) New Information-Sharing Agreements. In a heightened effort to crack down on unpaid employment taxes, more than half of the states have signed an agreement with the federal government agreeing to share information and coordinate enforcement efforts. Why? Because the government is losing money. That means the chances of getting caught and penalized are much higher, especially for CEOs and those in the spotlight.

4) Affordable Care Act. Without verifiable income (meaning, a W2), domestic workers are not eligible for government subsidies that help them afford health insurance. Verifiable income also helps them qualify for unemployment benefits, workers compensation coverage, social security and Medicare benefits, and potential tax credits. By protecting yourself, you’re not only avoiding a high-profile lawsuit down the road, you’re also benefiting the people who take good care of you and your family, now and into retirement.

5) Immigration Reform. Federal agencies now require immigrants to file tax returns as part of their path to citizenship. It’s critical that executives and families who employ undocumented workers start complying with the law by making sure they fill out all the appropriate forms and paying them as domestic employees.

Even if you mis-classify your household unintentionally, you—their employer—are liable, and failure to comply can cost you nearly $25,000 in penalties. That’s why using a trustworthy outsourced payroll provider is critical. They’ll not only handle payroll and taxes but also will help you stay on top of requirements and changes, giving you the freedom to focus on your business and hire employees, both in and out of your home, with confidence.