Given how commonplace it is for households to underreport domestic employment, the number of reported global domestic staffing workers is likely much higher than the studies have ever shown.
Domestic workers make up a large proportion of the global workforce comprising at least 67 million domestic workers worldwide and at least 2 million of those working here in the United States.
The profession ‘domestic workers’ includes gardeners, cleaners, nannies, drivers, and any other type of employment that occurs within a household that is not offered to the general public or through a private or public enterprise. Paying any domestic worker ‘under the table’, or, in cash without paying taxes, can have hugely negative consequences for both you as the employer, and them as employees.
Why Do People Pay Their Domestic Staff Under the Table?
Paying domestic employees under the table may at a glance appear to be the easier option. Employers feel like bookkeeping is easier by paying employees under the table, and domestic staffers may feel that they are receiving more cash in-hand tax-free.
However, in the long run, the opposite actually occurs.
For some, being paid under the table can be seen as the normal practice for the industry. Others may choose to be paid under the table if they can’t afford tax and insurance expenses, and don’t want any withholding of their pay. Some businesses also use this as a means for reducing their costs to remain competitive. At the end of the day though, this practice is ILLEGAL. It increases the burden on those who do pay taxes to fund infrastructure and local services and also directly impacts both the employer and employee.
How You Can Be Caught
Regardless of how trustworthy the relationship is between employer and domestic worker, there are a few common ways in which tax avoidance is discovered.
First of all, if instead of reporting your domestic employee as a W-2 domestic employee you try to classify them as independent contractors by issuing them a 1099, then you can be charged with tax evasion.
Secondly, if your employee does file their own income taxes while you don’t file your share of Social Security, Medicare, and unemployment taxes, then the IRS will have reason to launch an investigation. If the employee is let go and files for unemployment benefits and list you as a previous employer, then you can be audited, and the ex-employee can be declined benefits.
The same scenario applies if the employee needs to schedule a medical visit for an injury and doesn’t have worker’s compensation insurance. If you have not been paying taxes and the other expenses related to your role as an employer, you can be investigated!
How Under The Table Arrangements Can Hurt You As An Employer
The potential penalties from paying domestic staff under the table can cost much more than the value of the taxes that would have been initially paid.
This can be treated as a felony crime, so if your own employment relies on being in the public eye or requires a professional license, then a felony charge can be severely damaging. Some professionals lose their licenses in their respective fields. Paying tax evasion charges, back pay, and additional interest and penalties, adds up to a large sum you may have otherwise avoided. Additionally, you could pay felony charges and also be liable to pay both your and your employee’s FICA charges. In extreme cases, tax evasion can result in imprisonment for up to 5 years.
How Under The Table Pay Can Hurt Employees
While paying domestic staff gives them their cash up front, by doing so, they will not have access to workers’ compensation, Social Security, Medicare, unemployment insurance, or disability benefits. If domestic staffers are from low-income households, should they lose their job or be injured and be rendered unable to work, then they will not have access to all of the programs designed to support them and their families during hardship or in cases where they cannot support themselves. The average median wage of a domestic worker in the United States is just $12.01 an hour, $7.98/hour less than the average general wage in the country.
This trend has only been exacerbated by COVID-19 as employers seek to socially distance themselves and are forced to let their domestic staff go who consequently do not qualify for unemployment insurance. Many types of loans and rental relief opportunities require proof of income to be approved. Without the evidence of formal employment and income, domestic workers can be severely restricted in their access to living spaces and financial resources.
Without funds going towards Social Security (including the employer’s own contributions), domestic workers are also not working towards a financially stable retirement while at the same time missing out on benefits such as time-and-a-half pay for overtime work.
Each of these detriments of this directly harms domestic staffers’ abilities to financially support themselves in the long term, and hampers their access to insurance and compensation during illness and injury.
What Is the Right Way to Pay Domestic Staff?
You will first need to register yourself as an employer by applying for an Employer Identification Number (EIN), also called a Federal Tax Identification Number, and register your domestic staffers as W-2 domestic employees. It is your responsibility to ensure that anyone you employ can legally work in the US, so make sure to complete a Form I-9 Employment Eligibility Verification, and keep this in your records to protect yourself from being responsible for any illegal worker.
During the course of the employment, it is generally good practice to withhold your domestic employee’s taxes from their pay (which requires a Form W-4 withholding certificate), although this is not compulsory for domestic employees. The domestic staffer can choose whether or not they would prefer their taxes withheld from their paychecks.
Withholding taxes from domestic staffers’ checks does, however, lightens their tax burden at the end of the year since they have been paying along the way.
Finally, remember to pay your part of the payroll taxes, such as Medicare taxes and Social Security. Also referred to as the FICA tax, this amount is 7.65% of the employee’s wage which matches the same 7.65% FICA tax that the employee also pays. FICA taxes must be paid for any employee who is paid $2,300 or more in 2021.
You can find more information in the IRS Household Employer’s Tax Guide to follow any and all changes to the law.
Ready to get started on your domestic staffing journey? Contact us here.
- Cornell Law School, “Tax evasion”.
- Economic Policy Institute, “Domestic workers Chartbook”, last updated May 14 2020.
- International Labour Organization, “Who are domestic workers?”
- IRS, “Hiring household employees”, last updated 23 September 2020.
- IRS, “Employer ID numbers”, last updated 25 November 2020.
- IRS, “About Form W-2, Wage and Tax Statement”, last updated 11 December 2020.
- S. Citizenship and Immigration Services, “I-9, Employment Eligibility Verification”, last updated 19 May 2020.