Hiring Household Employees Legally Is Ridiculously Complicated Feb 28, 2016 - 3 min read

I believe in paying household workers, like nannies, on the books. Paying them off the books, like other forms of tax evasion, seems to me like stealing from the public. It feels morally similar to breaking into a library and taking cash from the register.

Being paid on the books also has several benefits for the worker. A history of income will help them qualify for a loan and ensure that they get financial protections, like social security and unemployment benefits.

This isn't cheap though. I saw articles advocating for it that said it'd cost about 10% more, and I have no idea how they got that. In my case, my wife and I are going to be spending about 30% more than we would have, once we tally up federal tax, state tax, social security, medicare, unemployment, disability, and workers comp (we “grossed up”: increased the gross pay so the net is our nanny's usual rate).

I wish this number was lower. Some of it seems pretty bizarre, like paying about $740 a year for workers comp (the rates are state regulated). How much risk is there really for a nanny to severely injure themselves while nannying? But qualitatively, I'm ok with spending extra money on this. “Taxes are what we pay for civilized society.”

But holy shit, the federal government, and especially New York State, make it a nightmare to deal with! It's this totally frustrating inefficient omg-so-many-steps-this-is-insane process. Many of the forms don't even perfectly fit the process of hiring a nanny. According to http://www.parkslopeparents.com/Nanny-101/babysitter-on-the-books-52435.html and my own research, people need to do something [1] like:

When hiring:

  1. Get an EIN
  2. Verify work eligibility
  3. Get a W4 from the employee
  4. Register with NYS as an employer
  5. Buy disability and workers comp insurance
  6. Notify NYS of the hire
  7. Figure out payroll (gross pay - ss, medicare, fed & state unemployment and/or disability tax, income tax withholding. this assumes pay is the same each week. if you eg want to pay the nanny more one week to stay late one night, you've got to do this again.)
  8. Annual pay notice (get signed, keep for 6 yrs)

Weekly:

  1. Pay employee (keep record for 7 yrs)

Quarterly:

  1. NYS income tax withholding
  2. NYS unemployment tax
  3. social security, medicare, and federal withholding filing

Annually:

  1. Disability and workers comp insurance
  2. Annual pay notice (get signed, keep for 6 yrs)
  3. Schedule H with 1040 (SS, medicare, federal unemployment taxes)
  4. State unemployment taxes (is there a state equivalent to schedule H?)
  5. W2 to employee
  6. W2 to social security admin
  7. W3 to social security admin

And then people in government get upset when everyone breaks the law…

[1] This list may not be 100% right; please don't use it for anything serious without checking its accuracy.