What Are the Consequences For Not Giving Your Nanny a W-2 Form?

When you hire a domestic worker, which includes private childcare providers, you’re required by law to provide them with a W-2 form each year showing that Social Security, Medicare and the proper income taxes have been withheld. IRS estimates regarding federal income tax law compliance among nannies and their employers is very low, with the majority of employers and nannies working under an “off the books” arrangement. Because the compliance rate is so notoriously low, some employers feel that the risk of being discovered is also relatively low and opt for the perceived savings that come with skipping compliance altogether. If you’re considering an under the table arrangement that will leave your nanny with no W-2 at the beginning of the year, there are some dire consequences you’ll want to take into consideration first.

Tax Fraud Charges

The worst case scenario nanny employers could face if their non-compliance is discovered involves criminal charges, though it’s not necessarily the norm. In most cases, payment of the back taxes, penalties for non-compliance and interest is enough to hold off the prospect of jail time. The government does have the right, however, to pursue those charges. Even if the chances of imprisonment are relatively slim, it’s wise to ask yourself if even the faintest chance of a jail sentence is worth saving a comparatively small amount of money.

Lack of Workers’ Compensation Coverage

In order to obtain a workers’ compensation policy to protect you from financial liability should your nanny be injured on the job, you’ll have to be registered with the IRS as an employer. Many employers are under the misconception that their homeowners’ insurance policy will cover any injury that occurs on their property, but this is almost never the case when it comes to domestic employees. The financial implications of a single lawsuit for an uninsured accident can be devastating, and can alert the authorities to your lack of legal tax compliance.

Potential Professional Risks

More than one promising, high-profile political career has been derailed by the discovery of illegal hiring practices and failure to pay the proper taxes for a nanny. Whether you have aspirations of running for political office or furthering a civilian career, your reputation could be immediately and irrevocably ruined by allegations of illegal hiring practices

Social Security and Unemployment Benefits

Nannies will inevitably find themselves without work at some point in their careers. Their charges grow up, families’ financial circumstances change and they even become incapable of working full time as they get older. A career of working under the table leaves your nanny with no Social Security benefits to draw from or unemployment benefits to utilize when she reaches the appropriate age. Some will still choose to file for unemployment benefits after the loss of a post, especially if there’s bad blood between her and the employers she’s left behind. In those situations, you’ll inevitably be found out.

You Can Be Held Liable at Any Time

Even years after the fact, you can be held liable for tax evasion for failing to pay nanny employment taxes. Because the statute of limitations never runs out for tax evasion, you’re never truly out of the woods. The prospect of serious criminal charges and exorbitantly steep financial penalties will never fade away, so you may find that you’re never able to relax for worry that your illegal activity will be discovered.

A 1099 Won’t Cut It

It’s not uncommon for nanny employers to feel that they’re circumventing complex nanny tax laws by deeming their domestic employee an independent contractor, and choosing to issue a 1099 instead of a W-2. The Internal Revenue Service has declared that domestic workers are almost always considered employees, not independent contractors. You could still face penalties for choosing to issue a 1099, even if you’re trying to be nominally compliant.

Your Nanny Could File Anyway

Some nannies readily accept an under the table arrangement, but those that are serious about pursuing a legitimate career in private childcare may refuse. Your nanny could still file her taxes with a Form 4825 that allows her to file without a W-2 form. The process is extremely complicated, but still possible, and could create a world of legal and financial trouble for her employers. Choosing not to provide a W-2 after withholding the appropriate taxes doesn’t mean that your nanny won’t file, only that you’ll be left holding the proverbial bag should she choose to do so.

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One thought on “What Are the Consequences For Not Giving Your Nanny a W-2 Form?

  1. Great articles with some valid points. Why is it that people are willing to consider their secretaries, assistants etc employees but not their nannies? This is something that people need to come to grips with; your nanny is an employee. You are controlling their schedule…done deal right there.
    Another common mistake I see is issuing a 1099 when the “contractor” should be considered an employee. Guess what? The IRS always wins. In an audit situation if they find you paid a contractor that should have been classified as an employee they will re-classifying them as such. You get to pay all the back payroll taxes as well as penalties and interest. Believe me it is not worth it. As the author points out here, just do it right the first time.

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