What happens if your household employer doesn’t pay taxes on your wages?
Is your employer paying you off the books? Here's what you need to know to protect yourself.
Whether you’re a nanny, a housekeeper, a house manager or a director of residences, it’s important to know if you should be qualified as a contractor or an employee. As a private service professional, you may be legally considered an employee — which means your principal should be paying household employer taxes on your wages.
Here’s a quick test: Does your employer control how and when you do the work? If so, then you are likely an employee. The same is true if you work mainly or only for that employer.
But if your employer inaccurately considers you a contractor, or simply pays you under the table, then they probably won’t pay any employment taxes. This is a bad idea — for both of you.
Understanding the whole picture will help you make decisions about handling your own taxes, as well as your financial relationship with your current or potential employer.
What are household employment taxes?
Your employer needs to pay three taxes: social security, Medicare and federal unemployment. They might need to pay state unemployment tax as well, depending on your state.
You’ll need to pay social security and Medicare taxes, too (but not unemployment). You and your employer split these two taxes. Your share should be withheld from your paycheck — it’s your employer’s responsibility to make sure it is paid. If your employer uses a payroll company, they won’t have to do anything after you fill out a W-4 (Employee Withholding Certificate) and they file it.
You can also ask your employer to withhold your state and federal income taxes, but it’s not a legal requirement.
What happens to your employer if they don’t pay employment taxes?
Your principal could be charged with felony tax fraud if they don’t pay household employer taxes on your wages. This could also lead to losing any professional license — for example, if they are a doctor, they could lose their medical license. If they are a lawyer, they could be disbarred.
Even if they avoid criminal charges, they may have to pay hefty penalties and interest. These costs could far outweigh the amount they save in the short term by paying you off the books.
What happens to you if your employer doesn’t pay employment taxes?
Even though paying legally is your employer’s responsibility, you could be in trouble, too, unfortunately. If you’re paid off-books, you’re in a difficult position. Reporting your earnings on your income tax statement could draw attention to your employers, who didn’t pay taxes on your earnings. If you don’t report your income, then you too are guilty of tax fraud, and you could face criminal penalties.
This is a lose-lose situation for you as the employee. Even if you decide to lie low, it’s possible that your employers will change their minds — maybe out of concern for legal ramifications — and start reporting your earnings. Then the IRS would turn its attention toward you.
Tax fraud is a felony, and the effects could ripple through your life. Finding a new position that does pay legally may be difficult, because many employers don’t prefer to hire felons. You also lose your right to serve on a jury, vote, and own a firearm.
Plus, being paid off the books means you can’t qualify for benefits you may need to depend on in the future, like social security, unemployment and more.
Benefits of being paid legally (including paying employment taxes)
Being paid legally benefits you in so many ways. If you have an official record of work history (and pay stubs), then you can qualify for a loan, a lease, a phone plan, a mortgage, and more. Without these opportunities, your quality of life may feel stifled, but with a clear record of wages, you can live the lifestyle that works for you.
Knowing you are following the law also brings peace of mind. You know that neither you nor your employer are at risk, and you won’t have to face unpleasant consequences from the IRS. Dealing with a legal case is incredibly stressful — even the thought of it is stressful. Getting paid legally means you won’t have to worry about an employment tax law case, real or hypothetical.
And most important of all: You’ll be eligible for social security, Medicare and unemployment benefits, because you and your employer paid into those programs.
What you can do if you’re being paid off-books or job hunting
If you are currently being paid off-books, consider having a conversation with your employer and asking them to think about switching. You can also share our companion article for employers, Household Employee Taxes: What Happens If You Don’t Pay?
Getting paid legally is easy with our partner HomePay. They facilitate household payroll in three simple steps:
- Customized payroll process. Set up a pay cadence that works for you, and they’ll onboard your employees to save you time.
- Tax returns filed automatically. They prepare your quarterly and year-end taxes – filed on-time, every time. Guaranteed.
- Unlimited access to experts. Contact their award-winning tax, payroll & HR specialists to have your questions answered quickly and accurately.
If you’re currently searching for a position, prioritize legal pay as one of the factors in your decision.
You are responsible for running some of the most complex households in the world and you deserve to be paid in a legal and respectful manner. Paying household employer taxes benefits everyone, and paying under the table simply isn’t worth the risk.