Nanny Tax Evasion Grows Bigger and Bigger

While we tend to think of tax planning as the province of the rich and large businesses, nannies and maids are affected by tax planning, too, although because they are not known for their campaign donations their concerns get no official attention.

From the point of view of servants, the tax code, the way it is administered, and societal norms all tend to worsen their circumstances, not improve them. For their employers, the lack of enforcement makes tax evasion profitable.

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The vast majority of servants do not earn Social Security credits, which means they will get less or, under a Reagan-era change, nothing in old age.

Fred Goldberg, a former IRS commissioner, estimated in 1995 that 2 million households employed legal domestic help, four times as many as filed Schedule H to report the pay and payroll taxes of their servants.

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Schedule H filings in 1994 totaled almost 500,000. In 1995, in announcing the supposedly simplified Schedule H, the IRS said it anticipated that about 720,000 taxpayers would use the form. Fewer than half as many did.

Since then the number of Schedule Hs filed has slid downward. In 2008 it was down to 219,000 or about 1 in 650 tax returns.

...[T]here are many forces at work in the increasing levels of nanny tax evasion, which in turn reduce the old-age incomes of servants, especially women.

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Given the political influence of paid domestic caregivers and maids, and the prospect that a simplified regime would increase the number of nanny taxpayers at least tenfold, however, the chances of actual reform are about on a par with getting caught cheating on the nanny tax.

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View TaxAnalysts' David Cay Johnston's article in its entirety on TAX.com.