Hiring Your Household Employee “Under the Table” May Cost More Than You Think

I recently spoke with Robert E. King, the founder of Legally Nanny, a law firm representing household employees and domestic employment and homecare agencies. King specializes in household employment legal and tax issues and has served as an expert witness in household employment matters.

He wrote an excellent article in the Riverside County Bar Association Journal which emphasizes why it is so important to hire in-home care help from a licensed, bonded agency who's caregivers are employees of that agency (not independt contractors).

Both he and the Journal allowed me to re-print the article and we thought it would be of interest to many. We are re-printing it here in its entirety.

You’re a busy attorney trying to juggle work and family. To help care for your children, you hire a nanny. Or perhaps your parents are getting older and need some help around the house, and you hire an elder care provider or companion to care for them.

Because you think you’ll never get caught, you’ve heard that it costs so much more to hire legally, and hey, let’s face it, you weren’t planning on being Attorney General any time soon, you think it’s safe to hire someone under the table. Think again.

The decision to hire someone “under the table” – although it may seem easier and cheaper – ultimately is penny-wise and pound-foolish. If (and most likely, when) you get caught, you will have committed federal tax fraud and endangered your ability to practice law. Even if you don’t get caught, you’ll be missing out on legal and tax advantages that would have applied if you were paying legally. In short, don’t do it.

Admittedly, hiring a nanny, elder care provider or other household employee legally can be daunting. There are many legal, tax and insurance questions that can make employing someone seem like an onerous task. On closer examination, however, hiring a nanny or other household employee can be a straightforward process that benefits both the employer and employee.

Getting Caught
There are many ways – such as your nanny filing for unemployment (a very common occurrence in today’s difficult economy), social security, disability or workers’ compensation benefits – that even an amicable parting between you and your nanny could result in you facing an investigation for unpaid taxes. And these are just the unintentional examples. They don’t include your disgruntled nanny, upset over some perceived slight, quitting and turning you in herself – or worse yet, trying to blackmail you. Or the neighbor or co-worker or family member who is envious or has always had a grudge against you reporting you. Or perhaps the IRS decides to audit you and notices the same amount of money flowing out of your bank account every two weeks and gets suspicious.

Under any of these scenarios, the result is the same: You get caught and face considerable consequences.

The Consequences
Because you must report household employment taxes on your personal federal tax return, failure to pay the appropriate taxes constitutes federal tax fraud. At a minimum, the consequences include payment of all back taxes, penalties and interest, and they can include federal charges of perjury and tax evasion, fines of up to $250,000, imprisonment for up to five
years, and a criminal record for the rest of your life. There is no statute of limitations for failure to report and pay federal employment taxes.

The professional consequences are equally severe. For example, Business and Professions Code section 6068, subdivision (o)(4) requires that if you’re charged with a felony such as tax fraud, you must report the charge to the State Bar, potentially jeopardizing your ability to practice and earn a living. Additionally, if you’re even considering becoming a judge or holding elected or appointed office, having a “Nannygate” story break about you, just as it did with Bernie Kerik,
Zoe Baird, Kimba Wood, or Linda Chavez, can ruin your reputation and career.

Regardless of your interest in higher office, as an attorney, you trade on your reputation for integrity, and being labeled a “tax cheat” isn’t good for anyone’s business.

Advantages of Hiring Legally
Happily, there are a number of advantages to hiring a nanny or other household employee legally. For example, you may be able to save taxes by putting up to $5,000 pretax per family per year into a Dependent Care Account (“DCA”) to help pay for your nanny. Alternatively, you may be eligible to claim the federal Child and Dependent Care Tax Credit, for a minimum tax credit of 20% for the first $3,000 in qualifying expenses for each of up to two children per year. Most importantly, you get to spend more time with your family and sleep well at night knowing that you’ve done everything legally. Don’t underestimate how Riverside Lawyer, February 2009 worrying about getting caught and the consequences of hiring illegally can take a toll on you personally and professionally.

Your Bottom Line
Perhaps the most common fallacy about employing a nanny or other household employee legally is that it will greatly increase your expenses. A review of the additional costs, especially in light of the significant potential tax savings, reveals this contention to be inaccurate.

Social security, Medicare, and state and federal unemployment taxes add approximately 9% of a nanny’s salary to the typical household employer’s costs. However, by maximizing your tax advantages, the true “burden” of hiring a nanny can be substantially less, as little as 4% of your costs.

An example best illustrates the true cost. The approximate 9% tax burden on a nanny’s $30,000 annual salary likely would cost her employer roughly $2,700. However, the employer could shelter $5,000 pretax in a DCA and use this money toward paying the nanny.

The employer normally would pay approximately 30% in taxes on $5,000 in earnings, taking into account the employer’s personal income taxes and other payroll taxes. Thus, the employer’s tax savings from using the DCA would be approximately $1,500. Subtracting this $1,500 savings from the roughly $2,700 paid in taxes yields an effective “cost” of approximately $1,200, or 4% of the nanny’s annual compensation.

Thus, in this typical example, the bottom-line cost of hiring someone legally is approximately 4%
more, a small price to pay for the peace of mind that comes along with hiring your nanny legally.
Remember, paying employment taxes isn’t an option, it’s the law.

For more information, you may contact the firm at (714) 336-8864 or at info@legallynanny.com.

Passing Away

When you work in the Senior Care business there is one fact-of-life that you cannot escape - and that is the end of it.

Recently, my stepfather passed away. An amazingly outgoing and friendly man, he was diagnosed with pancreatic cancer and passed away 3 weeks later. On his final morning in his home, he suffered tremendous stomach pain but waited until my mother woke up before telling her that he thought he should go to the Emergency Room. After a few days in the hospital he refused any treatment and only requested pain medications and passed away. The doctor called him "very brave" for his decision.

Dealing with the elderly and how you handle your final years is - if nothing else - an eye-opening experience. And if I've learned one thing it is that the saying "Life is for the living" is about as accurate a cliche as there is. Rich or poor, male or female - if we are so limited at the end of our life that we're forced to live much of it at home or - less desireable - in a nursing home - than no matter how much money we've saved, no matter how many different caregivers we have, there is little we can do except try to be as comfortable as possible.

In the last week, 2 clients of ours also passed away.

One was our client for 10 months and we'd cared for her son and daughter (both stricken with cancer) as well. All she wanted to do was stay at home with her dog and she was able to fulfill that wish until she passed away peacefully in her sleep.

The other was a client of ours for 36 hours. On Hospice and dealing with a myriad of ailments including a collapsed lung, she requested that her oxygen be removed and slowly went away from this world. Similar to my stepfather, she was by all accounts a gregarious person who demanded to be discharged from a Respiratory hospital less than a week before despite her doctor's protestations. She knew she was going to die but she was going to do it on her terms.

Within that same week, we started cases with 4 additional clients - ranging from a 26-year-old male dealing with a devastating injury to seniors who still have plenty of fuel to go. In the homecare business, clients come and clients inevitably go.

But what my stepfather, as well as our two dearly departed clients, teach us is that life is indeed for the living - and what that means and how we choose to deal with the end of it is unique to each and everyone of us.

When Caregivers Fail to Show

There are a lot of frustrating things to owning any business, but unique to owning a homecare business is that your employees are scattered throughout your service area. And when your service area is as large and diverse as Los Angeles, that causes more than a fair share of stress.

At Right at Home, we have an automated check-in system. When a caregiver arrives at the home of a client, they call a toll-free number from the clients home (not their cell) and clock in and out remotely. If they're late, I receive a text message and email notifying me of this. It's one of the many things has made Right at Home so respected throughout the industry.

While almost every day some caregiver somewhere is late and occassionally caregivers get their schedules mixed up and don't show up (and on a very rare occassion have chosen to tell us they quit by simply not showing up to a case and we never hear from them again), we work hard on screening our employees and have a relatively few such incidents.

With that said, the most unsettling times are the weekends when the office staff is off. And when you toss in a holiday weekend such as this Easter weekend, you stomach begins to immitate a Shawn Johnson floor routine.

This happend to us today when a caregiver failed to show for her normal Saturday shift with one of our most difficult clients. When we called her, she told that our staffing coordinator had said she had the weekend off. We informed her that it was just Easter Sunday she had off, not the entire weekend but by that time it was too late - she had made plans for the weekend and was unable to fill the shift.

At Right at Home we never leave a case uncovered and after seven (7) unsuccessful calls, our Director of Patient Care Services filled the case herself. And while this didn't particularly please the client (who felt she could just have easily been left to her own devices anyway) the daughter was thankful for our quick action.

It does beg the question, though, do a lot of other business encounter such scheduling issues?