The Immorality of Evading the Nanny Tax

It’s tax season, so many Americans are pondering whether to report the wages they’ve paid to nannies, elderly care workers, housekeepers, and the like. If you paid an employee $1,800 or more in wages in 2013, you are legally required to pay employment taxes.

Many ignore this rule, playing the odds that they won’t be singled out by the IRS. Recent estimates suggest that fewer than 250,000 U.S. households report household employee wages, even though occupations like child care, which are often based in homes, are growing, according to the Bureau of Labor Statistics. In a 2012 survey of 2,086 domestic employees in 14 metropolitan areas, less than nine percent worked for employers who paid into Social Security on their behalf.

On the surface, paying under the table seems like a pretty good deal for everyone: The nanny keeps more of her earnings and the employer doesn’t have the hassle of filing more paperwork.

But this type of arrangement is actually very risky business, and the person who stands to suffer most is not the family paying the additional tax burden, but the woman working the low-wage job.

Imagine being the household employee. Sure, it might be tempting to get paid under the table, especially if you’re barely making ends meet. However, what might seem like a rational decision (for undocumented workers it’s often the only option) actually has short- and long-term negative consequences. If a housekeeper or nanny is paid under the table, she has no access to unemployment insurance, workers’ compensation, disability benefits, Medicare, and perhaps even Social Security. In sum, she will likely lack the long-term resources required to look after herself and her family.

To make matters worse, under-the-table workers are also more vulnerable to the vicissitudes of the private economy. Without documented employment history, they lack access to better rental housing, improved terms for home and car loans, and opportunities to build a stronger credit history. In other words, it’s like they’ve never held a job. Try getting a mortgage without any record of employment.

I’ve observed these consequences firsthand as a scholar studying low-income women in the labor market. Danielle, a 49-year-old Chicago nanny who worked off-the-books for years, struggled to find a landlord who would accept an employment verification letter, her only proof of income. When she sought a loan, her only option was a payday lender who charged exorbitant rates. The resulting spiral of debt led to the repossession of her car and, without reliable transportation, she couldn’t keep her job.

Many household employees don’t realize that they are setting themselves up for severe repercussions in the long-run, so they request or go along with off-the-books payment arrangements.

When we perpetuate this underground system, we end up undermining the long-term economic stability of the very people who do the backbreaking work of caring for our families and helping us run busy households. These workers remain in the economic shadows, unable to build much of a financial future. In this age in which access to credit, the ability to document one’s productivity, and the need to plan for and protect oneself from life’s mishaps and inevitabilities are necessities, these workers are highly vulnerable: disproportionately female, non-white, and immigrant—populations that already occupy the bottom rung of the economic ladder.

Because their work is so physically taxing, household workers are also likely to heavily draw upon the public safety net in the future. For those invested in making sure that everyone “pays their share,” paying above board gives these workers an opportunity to contribute to the tax base.

We often focus on the employer when we think about under-the-table pay. Who wants to jump through hoops to report household worker wages? And what if the worker demands a higher salary to make up for lost take-home wages? The Earned Income Tax Credit, which President Obama has proposed expanding, helps low to moderate income employees keep more of what they earn. Employers can qualify for Dependent Care Credits and Dependent Care Flexible Spending Accounts, which could also be expanded for families under a certain income threshold. Some employers even hire a payroll service or pay the taxes owed by their domestic worker to ease the burden.

One thing the IRS could do to help: It could simplify the process for families trying to do the right thing. Streamlining the tax calculation and reporting process and offering employers and employees the opportunity to come above board without penalties would be a great start. Perhaps the $1,800 annual wage threshold should be raised, as an occasional housecleaner or babysitter could easily meet the limit and come under an onerous tax reporting process.

More and more Americans are hiring household help. It is therefore important to ensure that pay arrangements with domestic workers aren’t perpetuating economic inequalities. While it may feel like a challenge at the moment, paying above board is a necessary and humane way to treat those who play an intimate and critical role in our lives. It reduces the economic gap by ensuring that these workers have the financial opportunities and legal protections that most of us take for granted. They deserve an investment in their future, just as they have invested their labor in the futures of so many families.