Breaking the Barriers to Legal Pay
By Michelle LaRowe
This article is an excerpt from the Spring 2021 issue of Nanny Magazine. To subscribe please visit NannyMag.com.
In the United States, nannies are classified as employees of the families for whom they work.
Each year, federal law sets an annual wage threshold for domestic employees. For 2021, the threshold was set at $2,300. Once that threshold is met, the employee’s earnings are taxable.
Employers have tax obligations, too. These obligations include Social Security, Medicare, and state and federal Unemployment Insurance contributions, commonly referred to as “nanny taxes.” Social Security and Medicare contributions are required by both the family and the employee, though it is permissible for the employer to pay their employee’s share rather than withhold the share from their employee’s pay.
For a single nanny in Texas who earns a gross wage of $800 per week, after income taxes, Social Security taxes, and Medicare taxes, the nanny’s net or take-home wage comes to $675 per week. For the family paying the same nanny $800 gross per week above, their total weekly employer expense will be $887.
For many nannies and families, the cost of compliance alone serves as enough of a barrier to paying their nanny legally. For some nannies, the substantial reduction in cash on hand when comparing gross to net wages can mean the difference between earning a living wage and not, especially when you consider the need for health insurance, which most nanny employers do not provide. For many nannies, they simply cannot fathom how they can afford to take home less, and for many families, they cannot fathom how they can afford to pay more.
When confronted with this barrier, many nannies and families simply choose to be non-compliant, mistakenly believing that they indeed have a choice. A lack of education surrounding the legal obligations for families and nannies fosters the misunderstanding that there is an option to agree to an “under the table” arrangement.
A lack of understanding also extends to the risks of non-compliance and benefits of compliance to both nannies and employers. According to Guy Maddalone, Founder & CEO of GTM Payroll Services, “All too often we see nannies who are paid under-the-table unable to get a mortgage, credit, or car loan because they don’t have a verifiable income or legal employment history.” He cautions nannies to think twice about taking a job with a family that is willing to commit tax evasion and deny their employees the benefits of legal pay. “In-home caregivers are employees like those in the traditional workforce and need to be treated as such so they can enjoy the benefits of legal pay like paid sick leave, unemployment insurance, Social Security and Medicare, workers’ compensation, and more. Families too are at tremendous risk if they caught paying illegally with fines, penalties, and payment of back wages easily reaching tens of thousands of dollars. It seems like a big gamble when compared to the relatively small amount they would owe in employment taxes.”
Even when the risks of non-compliance are understood, monitoring and enforcement of current laws do not seem to be enough of a deterrent to foster compliance among employers. Sadie Kelly, a nanny from Chico, California, summed it up. “We all know the consequences of failing to pay nanny taxes, from back pay, professional license revocation, and tax fraud fines. How often do employers who pay illegally actually get caught? When they speak to fellow household employers, they hear more of ‘we just pay cash’ and less ‘did you hear about the lawyer that lost her practice because she didn’t pay nanny taxes? When paying under-the-table is as enforced as jaywalking, many people will not care to pay legally.”
For families who do understand their responsibilities and are committed to doing things right, the path to compliance is a complex one. From obtaining an employer identification number, to tracking and submitting withholdings, to issuing a W-2 at the end of the year, managing payroll responsibilities takes time and energy, something that many nanny employers simply do not have. “There needs to be more and easier ways to use a payroll service. Families do not want to spend the time to do the work. They are already busy enough,” shared Janna Jenkins, a nanny based in Atlanta, Georgia.
But given the informal appearance of the employer/employee relationship, many employers question if all this work is necessary given that they are an employer of one and that the workplace is their private home.
According to the International Labor Organization’s publication Formalizing Domestic Work, direct employment, such as that between a nanny and a family, can mask the employment relationship if it is not formally recognized. Having a written work agreement that specifically addresses tax and payroll responsibilities can help to clarify the employment relationship and the tax and payroll responsibilities of each party.
Like many reputable nanny referral agencies, Jennifer Hassett, owner of A Perfect Fit nanny agency, understands employers are busy. As such, she takes her responsibility of educating families and nannies and simplifying the path to compliance seriously. “We ask families on our application how they plan to pay their nanny and use their response as an opportunity to educate them on the importance of legal pay. We also connect them to a payroll company that we know will take great care of them and their nanny.”
As a payroll company CEO, Mr. Maddalone understands the value that agencies like Hassett’s bring to the table for both nannies and families. “Nannies will find better, more fulfilling jobs going through a reputable placement agency that partners with a payroll services firm to help educate families on their tax responsibilities and make it easy for them to comply with the law. These agencies – many are members of INA and APNA – advocate for ‘on the books’ employment to help caregivers realize the benefits of being paid on the books. They are committed to promoting the advantages of legal pay and risks of non-compliance to their families and nannies.”
Unfortunately, not all agencies are committed to educating parents and nannies on legal pay or only representing clients that are willing to be compliant. “I think one of the best ways to stop under-the-table illegal jobs is making it a requirement for all agency owners to only work with clients who pay nannies as W2 employees and follow all household employer laws,” says Ryan Jordan, who has been doing exactly this since 2013 when she opened her agency, Educated Nannies in Los Angeles, California. “We have educated thousands of parents. You can only do better when you know better.”
Louise Dunham of Placement Solutions, a nanny agency based in Melbourne, Australia, agrees. “Agencies need to be totally upfront and educate clients and not accept either clients who intend to pay ‘off the books’ or nannies who will accept these jobs.” In addition to not accepting jobs that only pay “off the books,” and nannies who will accept them, Leigh Aberle, CEO of Family First Household Staffing Agency based in Charlotte, North Carolina, believes nannies need to be educated as they may not even be aware of what their rights and responsibilities are.
But when families and nannies seek their perfect match independently—through online recruiting sites, social media, word of mouth, or nanny groups—education only becomes more of a challenge. Bayly Silverman of Your Happy Nest Agency in Atlanta, Georgia encourages those who know better and do better to educate others. She suggests that when there is a job posted that is paying below a fair rate or paying illegally, nannies should provide links to reputable sources (like those from nanny tax and payroll firms) to let them know what they need to do to be compliant.
But the buck does not stop with the employers. While it is the employer’s responsibility to be compliant, nannies have a role to play, too. Erin Jones, a professional nanny and household manager from Colorado, suggests that “one of the most effective ways to stop under-the-table jobs is for nannies to demonstrate professionalism, direct communication, and clarity around what they deserve as valid employees in the industry. If nannies stop accepting under-the-table pay as an option, this can stop.”
Rachel Lawrence, agency partner with HomeWork Solutions, Inc., agrees. “I would say the best thing nannies can do to help curb under-the-table jobs is to educate themselves and other nannies in their community about going to interviews prepared to talk in gross numbers. When a nanny arrives at an interview with a firm grasp of what gross (before tax) pay she is looking for, it sends a message to the family that she expects to be paid over the table and have her taxes withheld. When each nanny they interview shows up with gross pay figures, it sends a community message that the nanny industry as a whole will accept nothing less than fair and legal pay for the work our profession provides.”
The International Labor Organization states in its publication Formalizing Domestic Work that “there remain many practical challenges to ensure compliance and formalizing jobs, including (i) setting up appropriate mechanisms to implement, monitor compliance with, and enforce the law; (ii) designing efficient systems to register domestic workers; (iii) training government staff in new mandates and (iv) fostering a commitment among the target population to comply with the new standards.” This suggests that removing barriers to the formalizing of jobs, strengthening the benefits and incentives of formal jobs, and reducing the cost of formalization can help ensure compliance.
But those in the industry believe that it is the commitment of all stakeholders to fostering a culture of compliance in our community that will lead to lasting change. According to Sue Downey, career nanny and organizer of Nannypalooza, it is not up to the agencies, the nannies, or the parents to solve this problem. It is up to everyone. Each person in the equation must be educated on their responsibilities and stop breaking the law.