For household employees like nannies, housekeepers, household managers (and more), there are many benefits to being paid “on the books” or through a payroll system. For high profile families, or families that are at risk for frequent audits it is absolutely necessary that they pay their employees legally, withholding their employer share of taxes. Most agencies require or encourage that families pay their staff legally via a payroll system because it also has short term and long-term benefits for nannies and other household staff as well.

For those accustomed to being paid in cash, they may be wondering, “What are the benefits of being paid through a payroll system, “on the books”?

Benefits of legal pay

If your employer withholds your share of state and federal taxes for you, you will owe less money when taxes are due. Being a legal, tax paying citizen has other short-term benefits like:

• Unemployment Benefits

  • If you lose your job, unemployment benefits will supplement your pay for up to six weeks while you look for a new job. The huge benefit of unemployment pay became strikingly obvious during the pandemic, when many nannies paid “under the table” found themselves without jobs and had no proof of previous employment.

• Verifiable Income

  • Having verifiable income will help you when you are looking to buy a house, apply for a loan, or open a credit card.

• Legal Employment History

  • This is helpful when applying for your next job, especially if the employer runs an employment history check.

• Social Security and Medicare Benefits

  • Your employer splits this cost with you. Both the employee and employer EACH owe 7.65% in Social Security and Medicare (6.2% for social security tax and 1.45% for Medicare tax) for a total of 15.3%.

• Healthcare Subsidies

  • According to Care.com, “If you purchase an individual policy on the health insurance marketplace and are paid legally, you could qualify for a subsidy to lower the cost of your premiums.”

• Workers’ Compensation Benefits

  • This is something you hope you will never have to use, but if you are sick or injured on the job, workers compensation will provide cash benefits and/or medical care. Illinois is a state that requires workers compensation for full-time household employees.

What forms do I need to complete to set up payroll?

When you are hired as a household employee, the proper forms to complete are typically a W-4, I-9, and W-10. At tax time, household employers should provide you with a W-2, NOT a 1099.

Am I an independent contractor?

Household employees are not independent contractors and should never file a 1099 of any kind for their income. Independent contractors that receive 1099 forms are self-employed and end up paying twice as much in taxes as a household employee receiving a W-2.

Is it better to be paid in cash or via a payroll system?

If your employer pays you cash, and does not withhold taxes for you, you will be responsible for the full 15.3% of Social Security and Medicare tax rate yourself, instead of 7.6%, and you will be missing out on the benefits of being paid through payroll.

Apps like Venmo are now monitoring recurring and suspicious transactions and will flag those that appear to be for goods or services . According to Venmo, “Anyone who receives at least $600 in payments for goods and services (in a calendar year) through Venmo, or any other payment app, can expect to receive a Form 1099”. This is why sending payments as personal payments to avoid seller fees and IRS reporting is not an effective or legally compliant method either.

How much will my take-home pay be after taxes?

It is industry standard and best practice to negotiate your hourly rate in terms of “gross” pay, or “pre-tax” pay before taxes are taken out. Keep in mind how much you need to make in “net” or take-home pay. This ensures you will not be underpaid, helps calculate overtime, and it helps keep things consistent when comparing salaries in the industry.

This nanny tax calculator that GTM Payroll Services offers can be a helpful resource.

You’ve got enough on your plate in your day-to-day life — let us make your life easier by handling your unique household staffing needs.

If you are a family looking for a nanny, house manager, or other domestic employee, submit an application with My Household Managed.

If you are a professional household employee looking for a job, check out our job board, and apply at My Household Managed.

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