Should You Pay the Nanny Tax?

Caroline Kennedy is the last person I'd have thought who'd fail to pay taxes on domestic help, considering how big an issue this has been in the last couple of decades of national politics. The New York Times offers some explanatory perspective on why we're still seeing these scandals popping up and derailing promising political opportunites:

The nanny tax issue simply won’t go away.

Ever since Zoë Baird, President Bill Clinton’s first nominee for attorney general, withdrew her name from consideration because she had broken rules relating to household employees, the issue has tripped up public figures every couple of years.

This week, it became part of the chatter around Caroline Kennedy’s decision to pull out of contention for New York’s vacant United States Senate seat. This month, Timothy F. Geithner’s nomination for Treasury secretary hit a snag over, among other mistakes, an issue relating to a housekeeper.

Every time this happens, it leaves a little pit in the stomach of hundreds of thousands of people who are breaking the law themselves. Various estimates put the tax cheat rate at 80 to 95 percent of people who employ baby sitters, housekeepers and home health aides. In 1997, taxpayers filed 310,367 household employee tax payment forms with the Internal Revenue Service. By 2006, the latest year for which data are available, the number was down to 225,441.

Given the unease, why don’t household employers pay the taxes and other costs that other larger employers do as a matter of course?

“The chances of getting caught are slim,” said Arthur U. Ellis, president of the Nanny Tax Company in Chicago, which helps clients pay on time. “And why should I pay for something when the vast majority of people are not paying it?”

Some employers don’t want to pay the extra 10 percent or so on top of the employee’s salary to cover the taxes and other costs. The employees often balk, too, because they don’t want taxes withheld from their paychecks. They may demand higher wages to make up for money that an employer takes out, raising employer costs even more.

Perhaps the most daunting part of all of this, however, is how much effort and paperwork it takes to do the right thing. Just how complicated is it to comply? Let us count the ways in the list below, which I derived in part from I.R.S. Publication 926, the “Household Employer’s Tax Guide.” What follows should serve as a good starting guide for anyone who’s finally been scared straight by the news this month ...

Check the link for the rest.