Would you pay your nanny under the table?
Would you pay Mary Poppins under the table if she were your children's nanny? What are the risks and benefits for your nanny, the employee, or you as the employer? We will also analyze it in this article.
What is the cost of employing your nanny? Let's take the following example:
Basically, you need a full-time employee 5 days a week, 8 hours per day. In this article, we'll use the USA's costs and rules, but they're very similar in other countries as well.
Here's how it works:
The cost of hiring a full-time nanny may range from $30000 to $40000 per year. Let's take $35000 per year as the average for our discussion.
Based on 52 weeks per year, the cost is $670 per week. If we pay under the table, then this is the employer's cost as well as the employee's income. We will ignore commuting costs in this discussion.
Let's find the difference when paying according to the law. In this article, we will focus on the state of California since there are a number of states in the USA with different tax rules.
First we have the FICA taxes (Federal Insurance Contributions Act)
There is 7.65% employer part and 7.65% nanny part (withhold)
As our nanny salary exceeds $1000 per quarter in California, we must pay Unemployment Insurance (UI) and Employment Training Tax (ETT). State Disability Insurance (SDI) must also be withheld.
Here are the rates in 2022:
There is a 1.1% SDI (withhold)
The Employment Training Tax is 0.1 percent
The unemployment rate ranges from 1.5 percent to 6.2 percent. The taxable wage limit per employee is $7,000 per calendar year. Assuming you have a new employee (the nanny), then the rate is typically 3.4%.
A California employer paying his nanny a salary of $35000 a year can see that the difference between legal and under the table is small.
An additional annual cost of $2950 or $56.73 per week for the employer.
Employees are deducted $2789 annually or $53.63 per week.
When compared to the annual salary, this represents a cost increase of less than 9%. It's a no-brainer that the risk isn't worth the savings. If something goes wrong and you end up in court, this savings is not worth the risk. Should you consider a public position in the future, you would not want this small saving to hinder your progress https://en.wikipedia.org/wiki/Nannygate
Mary Poppins or your nanny are not worth paying under the table! Why do people do this? Find out why people pay under the table.
You can refer to the rate for California in this link: https://edd.ca.gov/en/payroll_taxes/rates_and_withholding/
Equipped with these number we can now check the numbers.