The Consequences of Paying Somebody Off the Books

Do you have a household employee that you pay off the books?  Well if you are one of the estimated four million households that employ a babysitter, cleaning person, caregiver, aide or other household employee, you may want to reconsider this after you read this article. 

No one will argue that paying someone in your household on the books is a chore and headache taking a chunk of your already precious time.  The monthly and quarterly tax forms as well as the logistics around payroll are time consuming and burdensome.  Yet, most people do not realize the consequence of their decision. 

Consider for a second some of the inadvertent ways one might get caught.  Remember, these are some scenarios for how YOU GET CAUGHT for someone you are on good terms with:

• Unemployment: You terminate your nanny's employment. She's now out of work and files for unemployment benefits. When asked about her last place of employment, she names you. There are no records of you paying employment taxes.
• Workers Compensation: Your nanny gets hurt while working in your home. Now she can't work but still needs to pay her bills, so she files for workers compensation. Because you hired your nanny illegally, you didn't/couldn't get workers compensation insurance, she reports you in order to obtain benefits.
• Social Security: Your nanny is older and wants to retire. Upon retiring, she claims social security benefits. Her benefits are lower than she expected, and she realizes that for the time you employed her illegally, she wasn't contributing to social security. To obtain more benefits, she reports her employment with you to the Social Security Administration.
• Taxes: You think you're smart and describe your nanny as an independent contractor responsible for her own taxes. Then your nanny's tax bill comes due and she realizes that she's responsible for both the employer's and employee's share of Social Security and Medicare, resulting in a much larger tax bill than she expected.

Now imagine what could occur if you have words with your employee and then you realize how much power he/she can have for revenge.  Not convinced yet?  Well, think abut the consequences of getting caught.  Because you must report household employment taxes on your personal federal tax return, failure to pay the appropriate taxes constitutes “federal tax fraud”. We’ll leave the state tax fraud issue alone at the moment for purposes of simplicity.  Those three little words subject you to the following consequences:

• Payment of all back taxes, penalties and interest.
• Federal charges of fraud and tax evasion.
• Classified as a Felony, where civil and criminal penalties, including fines, potential imprisonment, and a criminal record. 

And these examples don't even factor in a disgruntled person, upset over some perceived slight, who quits and turn you in (or worse yet, tries to blackmail you).  How about a neighbor/co-worker/family member who is envious or has always had a grudge against you and reports you.

Or perhaps the IRS decides to audit you and notices the large amounts of cash or checks flowing out of your bank account every two weeks and gets suspicious.  Under any of these scenarios, the result is the same: YOU GET CAUGHT and face the consequences, including paying all back taxes, interest, fines, civil and criminal penalties and potentially ruining your reputation and career.

Being labeled a tax cheat is bad enough; but it can ruin your reputation and career, especially if you're an attorney, accountant, financial advisor, or any professional who trades on integrity and has professional credentials. Being labeled a "tax cheat" isn't good for anyone's business.  Furthermore, many state laws require that if you've been charged with a felony, you must report the charge to the state bar or professional certifying organization, regardless of guilt, jeopardizing your ability to practice and earn a living.

Oh, and by the way, if you advise your nanny not to pay her own taxes, that results in additional charges of fraud and conspiracy, with penalties of up to three to five years, respectively, as well as fines of up to $250,000.  Also, don’t forget that there is no statute of limitations for failure to report and pay federal employment taxes.

In addition to these penalties, you undoubtedly will pay significantly more in professional fees to lawyers to defend you in an audit or criminal prosecution than you ever would have spent paying your nanny legally.  How can we forget what happened to the career of Bernard Kerik, former New York City Police Commissioner and  President Bush's nominee for Secretary of Homeland Security.

Redlig Financial Services provides a full range of household payroll services designed to take the pain out of the process.  Gone are the hassles and headaches with preparing a payroll and all of the tax forms that have to be filed on a monthly and quarterly basis.  Our checklist is designed to get you up and running in four weeks, streamlining a logistically complicated process.  To see the more information click on the following link: