EDD (Employment Development Department) clearly states that all qualifying domestic employees are to be placed on payroll.



"Qualifying" means that if they are receiving a salary of at least $750 per calendar quarter, this qualifies the employee and employer to pay payroll taxes.

Although payroll taxes may seem exorbitant, there are a couple of savings that can be obtained by placing your nanny or housekeeper on payroll.

You can save taxes by putting up to $5,000 pre-tax per family per year into a Dependant Care Account if applicable and offered by your employer. Depending on your effective tax rate, this could save you hundreds or even thousands of dollars in taxes while you use this pre-tax money on eligible dependant care expenses, including paying your child-care provider.

Another form of savings is a Child Care Tax Credit that you may be eligible to claim under federal tax law. For 2005, this amount of credit, if applicable, allows you to receive a minimum of 20% for the first $3,000 in qualifying expenses for each of your first two children per year.

Finally, you will have peace of mind and sleep well at night knowing that you've done everything legally. You will never have to worry about getting caught and the consequences of hiring illegally.

The bottom line is that after calculating potential tax advantages, hiring a nanny legally typically adds approximately 4% to 5% to your cost. On a $20,000 annual salary, that's roughly an additional $800 -$1,000. Social Security, Medicare and state and federal unemployment taxes add approximately 9% of a worker's salary to a typical household employer's costs.

However, by making the most of tax advantages available to you, the true burden of hiring a nanny can be substantially less.

Apart from the very important issue that it is illegal when you do not put your nanny or housekeeper on payroll, there is another reason to think about doing the right thing.

The people who do this line of work usually expect their wages in cash due to the fact that most employers just don't want to be burdened. This actually throws off the wage curb for those of us who are paying our domestics properly. If you are offering $15/hr gross and your neighbor is offering $15/hr cash, which job do you think the employee would prefer?

We need to all get on the same page and pay our domestics properly. A person who pays on payroll often has to up the gross amount to equal what the employee wants net of taxes. If everyone offered their domestics salaries from a gross (before tax deduction) tax perspective, we would not have such problems with respect to salaries.

Employees should be informed of the advantages of being on payroll. For example, there is social security, worker's compensation, unemployment, and creating a credit history. What you may encounter is a disgruntled employee filing for help and reporting you at the same time.