Payroll Laws: My Own Nanny-Tax Nightmare

It's a good thing I haven't been tapped for public office. As I discovered last year, it's frighteningly easy to run afoul of the nanny tax, even when you're trying to follow the rules.

I dedicated dozens of hours to paperwork and even so, missed a payment for my nanny's unemployment insurance taxes. The $250 fine hurt. But the worst came later when my husband and I had to part ways with our nanny, in part because we were spending so much trying to comply with I.R.S. rules that we couldn't give her the raise she wanted. And so, on behalf of the hundreds of thousands of families like us, I'm hereby asking Washington to make it a little easier for us to do the right thing.

My husband and I had avoided the nanny-tax hassle for years, relying on grandma, flexible job schedules, an au pair who was exempt, and a parade of high-school and college babysitters who we didn't pay enough to hit the tax threshold. Last year we hired a young woman to watch our three children 20 hours a week, and we suddenly found ourselves owing payroll taxes. It was as if we'd morphed into a corporation. We weren't prepared for how expensive it would be, nor for the hair-pulling, late-night sessions in front of an Excel spreadsheet. As a friend said, "I have to do as much work to pay my nanny as 3M does to pay its employees."

I started polling friends about nanny taxes this week after President Obama's pick for chief performance officer, Nancy Killefer became yet another casualty of a nanny tax scandal. If you want to separate your real friends from your Facebook "friends," by the way, ask whether they pay the nanny tax. If they don't trust you, it's an awkward conversation. About half my friends with nannies pay the taxes, including one lawyer dad who said he wouldn't be able to sleep at night if he didn't. "If I'm not paying this, then the woman who takes care of my children is not going to get the Social Security she deserves," he said. "For a lot of nannies, it's not like down the road they're going to be making so much money that it will replace these low earning years."

Then there was my friend who pays a babysitter to watch her child while she attends school. When I told her late one night that she owed the nanny tax, she paused, and then said with utter fatigue, "I'm just going to forget we had this conversation." I happen to know she would have been forced to cut into her grocery budget to pay even a couple more dollars an hour. And those few bucks can add a surprisingly amount to the cost of childcare.

For us, paying the tax meant an extra $200 a month. For some families, the extra hit can be the difference between making money by going to work, or barely breaking even. Call me naive. We hadn't factored in taxes when we agreed with our nanny on an hourly rate. Suddenly her $14 per hour wage turned into a $16.50 per hour expense after we added federal and state unemployment insurance tax and 15 percent in FICA taxes (6.2 percent for the employee portion of Social Security, another 6.2 percent for the employer portion; 1.45 percent for the employer portion of Medicare and another 1.45 percent for the employee portion). We could have taken the employee portion out of her wage, but we knew she would have seen it as a pay cut.

As it turned out, we ended up mutually parting ways before she'd been with us a year. She wanted a raise. And after paying FICA, we simply couldn't pay her more. Meanwhile, we were competing against families who can pay more because they pay in cash. Even if you can afford to match the competition and still pay the nanny tax, the paperwork alone might be enough to send you over the brink. One friend tried to calculate her nanny taxes herself. She got it wrong and was fined. And she is doctor who understands statistics. "Trying to pay this on our own created so much stress," she said. "It seemed ridiculous that it should be that difficult." She ended up forking over $500 a year to have a payroll company handle it.

You can't even trust your accountant to get it right. After we got inaccurate advice from our tax-prep firm we too tackled the tax ourselves. I applied for a federal and a Minnesota tax ID number, printed out weekly payroll receipts and calculated the Social Security and Medicare taxes to withhold. I stayed up past midnight trying to fill out a quarterly wage detail on the Minnesota State Unemployment Web site before the deadline passed and we were fined … again.

I'm not suggesting that we eliminate this requirement, but we should not have a system where anyone who's ever hired a summer babysitter and not paid the tax is made unfit for public office. Parents owe payroll taxes if they paid a nanny more than $1,600 in 2008. Let's raise that threshold. And simplify the paperwork. In the meantime, here's my advice: If you aspire to public office, hire a company to handle your nanny tax. Or, enroll your child in the nearest child-care center. It's cheaper, you won't have to bother about taxes. And, you'll meet more of your constituency.