By Stephanie Breedlove, Founder of Breedlove & Associates
As we approach the fall hiring season, there will be lots of nannies talking to lots of families about new employment relationships. In case you or someone you know is in this position, we thought it would be a good time to share tips on how to avoid getting hurt by tax and legal mistakes.
The two biggest mistakes we see are: 1) confusion about “gross” and “net” pay; and 2) worker misclassification.
Here’s what you need to know and do to prevent these mistakes.
Confusion About Gross and Net Pay
It is very easy for families and nannies to get their signals crossed on this topic – and when that happens, it creates big problems on the first payday. “Gross” pay refers to the compensation prior to taxes. The government requires all reporting to use “gross” dollars. Additionally, all benefits (retirement income, unemployment, disability, workers’ compensation, etc.) are calculated based on gross compensation.
“Net” pay refers to the “take-home” pay after taxes have been withheld. Take-home pay is important for individual budgeting purposes, but it should never be used for compensation discussions.
Instead, all compensation discussions should be based on “gross” wages. To make sure everyone is on the same page regarding money, we recommend creating a sample paystub during the offer/negotiation process. When both employer and employee can see the “gross” wages, the tax withholdings and the “net” pay with real dollars, it eliminates any chance for confusion. Additionally, you as the employee can see the employer taxes that the family will pay on your behalf to help fund your benefits (i.e. retirement income, medical insurance during retirement, unemployment benefits, disability & workers’ compensation benefits, etc.).
To help you with that, we have a free Nanny Paycheck Calculator so both parties can run payroll scenarios and print out sample paystubs. This quick exercise will make sure there are no financial surprises on the first payday.
The second major problem area is worker misclassification. By law, nannies are considered to be “employees.” If a family misclassified you as an “independent contractor,” they’re committing tax evasion because they’re not paying the required employer taxes. Instead, the employer tax burden gets pushed onto the misclassified worker – since independent contractors have to pay employee taxes AND most of the employer taxes. Financially, that’s an additional tax burden of 7.65% (As an example, if you earn $40,000 per year, misclassification would cost you an additional $3,000 in taxes each year!).
Again, the remedy is to make sure the family is withholding employee taxes from your pay and planning to pay employer taxes on your behalf. They should also provide you with a Form W-2 at the end of the year.
If a family tells you that they plan to give you a Form 1099 at the end of the year, bells, whistles and danger signs should go off in your head. Form 1099 is for independent contractors.
To prevent this mistake, we advise you to share our Nanny Tax Answers, which helps explain the dangers for both parties. Chances are they’ll be grateful to you for helping them avoid accidentally committing tax evasion.
Keeping the law in mind and following these simple tips will help you and your employer have a successful financial relationship – one that saves you money and provides you with important benefits and protections.