4 reasons why nannies and senior caregivers need to be paid legally
Being paid on the books has important short and long-term benefits for caregivers
As a household worker caring for a family’s loved ones, you should view yourself as a professional because you truly are one. And just like the rest of the professional working world, you should be paid legally, rather than under the table.
Yes, that means taxes are involved, but what you may not realize is that taxes provide you with several very important benefits and protections.Below are four short and long-term benefits you receive when the family you work for pays you on the books:
- A traceable employment history. This may not seem like a big deal, but there are several life situations where youll need to provide payroll documentation. Some examples are applying for a car loan, a mortgage, a student loan, a credit card, an apartment lease, health insurance or auto insurance. If your employment is not documented, it’s as if you don’t work and have income, which makes it difficult to be approved for any of these items.
- Unemployment insurance benefits. When paid legally, you are entitled to receive approximately 50% of your salary for up to six months if you lose your job due to no fault of your own. This benefit is free to you as your employer pays taxes toward the cost of the program.
- Social Security & Medicare credits. When you retire, you’ll receive money for living and medical expenses. How much you receive is based on several factors, including how much in Social Security and Medicare taxes your employers have sent to the IRS on your behalf during your working lifetime. According to theUrban Institute, the average American currently can expect to receive approximately $550,000 in Social Security and Medicare benefits after contributing roughly $362,000 in taxes over their working lifetime. Thats about $1.50 in Social Security and Medicare benefits for every dollar in taxes they have withheld.
When paid as a professional, your employer matches the taxes they withheld from you on a dollar-for-dollar basis. That means every year you work under the table takes away from your potential retirement benefits. And if you’re never paid legally, theres a chance you’ll never be able to stop working.
- Healthcare subsidies. As a requirement of the Affordable Care Act, you must have a health insurance policy. 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. See how much you could save by using the Kaiser Family Foundation’s subsidy calculator.
How to think about legal pay when finding a job
Because everyone’s taxes are different depending on where you live, how much you make, and other factors jobs have to be posted in terms of gross wages (before taxes) instead of net pay (after taxes). However, most people need to know how much they can expect to put into their bank account each pay period. To make things easier on you, work backwards using a paycheck calculator to convert net pay into gross wages. Then you’ll know what rate of pay to ask for when you apply for different caregiving positions.
For example, say you need a net (take-home) pay of about $500 a week. Using Form W-4, you select Single with 2 allowances, use a paycheck calculator and determine you need to ask for a gross wage of $630 per week. Here’s what your paycheck looks like:
|Gross Weekly Wage:||$630.00|
|Social Security & Medicare||($48.20)|
|Federal Income Tax||($51.78)|
|State Income Tax||($28.64)|
|Total Tax Withholdings||($128.62)|
With this pay structure, you meet your budget and are entitled to all benefits and protections under the law.
Two additional notes about being paid legally
- Even if you have been paid under the table, you still owe the federal and state income taxes when you file your personal income tax return. This is because the IRS requires you to pay taxes on any wages you earn throughout the year.
- If the family misclassifies you as an independent contractor by giving you a Form 1099, you would owe all the taxes listed above, plus an additional $48.20 per week (roughly $2,500 per year). The reason is due to the form requiring you to pay both the employee and employer portions of Social Security & Medicare taxes. You also would not be eligible for unemployment benefits because no unemployment insurance taxes were paid by the family while you worked for them.
Being paid on the books is not only the law, it also provides significant benefits which you as a professional deserve to have. So don’t think of it as a tax bill. Think of it as an investment in your financial future.