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If you employ a nanny, chances are good that you’re paying him or her under the table.

Kerri Swope, senior director of Care.com HomePay estimates that just 20% of nannies are paid the way the U.S. government requires. Other sources put the estimate even lower. The chances of getting caught are slim — it usually happens when a nanny who is no longer needed files for unemployment and there is no work record, or if the employer is nominated for public office. And, as you might expect, some professions are much more likely to comply with tax laws: public figures, accountants, lawyers and doctors, or other professionals whose professional licenses or reputations might be at risk if they don’t

In many cases, nobody even mentions taxes during the process of hiring a nanny. And during hiring is the very best time to bring it up, Swope said. While many parents assume nannies do not want to be taxpaying employees, that’s not always the case. Because most nannies are still relatively young and may be getting established in life, they may not realize initially that their incomes won’t count when it comes to verifying income to buy a car, get a credit card or even a mortgage. And, should they lose a job — kids do grow up — they will be eligible for unemployment only if they were paid the right way.

But doing the right thing is far from easy. For one thing, compliance involves an astonishing amount of paperwork and time —about 55 hours a year for a typical family, Swope said. It also removes the possibility of hiring anyone who is not eligible to work in the U.S. (and that would leave out thousands of beloved family employees). Swope says the cost of a nanny may be about 20% more if paid legally, but tax breaks can offset some of that.

Besides a Schedule H (Household), there are quarterly state taxes and unemployment insurance, plus federal and Medicare taxes that all need to be accounted for. And the bookkeeping requirements are stringent. Some employers hope that filing a 1099, and classifying the nanny as a contractor, will cover it. (That means the nanny is self-employed and pays self-employment tax, rather than splitting the taxes with her employer.) Swope points out that this doesn’t fit with the IRS definition of a contract worker, who is generally able to decide when and where the work will be done.

Why Go the Legal Route?

Reasons to want to do it the right way would include wanting to avoid possible penalties (up to $25,000 in fines and a year in prison) or wanting to be sure that someone who has become an extension of your family is protected in his or her retirement years.

Some people want to come clean because “everyone else is doing it” is an excuse they won’t accept even from their kids — or they didn’t know there were ways to navigate the complicated tax system. (There are many DIY software services or payroll services can take care of the requirements for you, but that will add to your costs. Still, compliance will make you eligible to take advantage of tax breaks for child care expenses and it offers protections to the nanny as well.)

And if, as 2014 is coming to a close, you wish you had done things the right way, it’s not too late. Swope said most employers who decide near the end of the year that they want to comply with the law can still do it. In those cases, she said, they typically pay the nanny’s part of the taxes as well — an unexpected tax bill is hardly the surprise families want to give a trusted caregiver near the holidays.

And if you need to transition from under the table to aboveboard, Swope suggests letting the nanny know what’s in it for her. Being able to document a salary can be important, as can having a work record. Swope’s company has an online calculator that allows employees and employers to see how complying with the law is likely to affect paycheck size (some of it depends on how the worker fills out her W-4).

“Would you rather have $600 or $500?” is a pretty easy question to answer. However, “Are you willing to give up the ability to qualify for a loan, a year’s worth of employment history for Social Security benefit purposes and the right to collect unemployment benefits . . .?” Well, that’s a different question entirely.

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