It's not just politicians who shirk the 'nanny tax'

NEW YORK - It's a given among the stroller set that many of them share a secret powerful enough to bring down political careers: They don't pay taxes on their nannies.

Leslie Rubin, a lawyer who has a 5-year-old and a 9-month-old, doesn't want to name names. But she's pretty sure most of the parents in her family-friendly Brooklyn neighborhood aren't following the law.

"I am about the only person I know who pays on the books," she said. "I think the only people who do are lawyers or other government workers."

Only about 225,000 people paid taxes on household help including nannies in 2006, the latest year reported by the IRS. But the government estimates that 770,000 of the nation's 1.4 million child-care workers work for private households or are self-employed.

That means that, at a minimum, tens of thousands of Americans fail to pay the tax - but experts in the field say that the number is probably much higher.

"It's hard to estimate how many nannies are working, because the vast majority are paid off the books," said Michelle LaRowe Conover of the International Nanny Association, the umbrella organization for in-home child care.

Sarah Edwards, who helped run a survey on nannies by Park Slope Parents, a parenting Web site in Brooklyn, estimates that 9 in 10 of her readers don't pay the nanny tax.

In New York City neighborhoods like hers, day-care spots are so coveted that couples go on waiting lists before they even have a child. That means the only option for most working parents is to hire a nanny - which doesn't come cheap: Nannies can make between $450 and $750 a week, not counting taxes or health insurance, which add several hundred dollars a week.

"People are caught in a bind. Most people I know aren't hiring a nanny because they are wealthy," Rubin said, but because "there are so few day-care slots available."

For public officials like Zoe Baird and Nancy Killefer, failure to pay the tax derailed them politically: Both women resigned as choices for top political office - Baird as President Clinton's pick for attorney general, and more recently, Killefer as President Obama's choice for chief compliance officer.

But for everyday families, it's more about principles than a fear of getting caught, because most people aren't. An IRS audit is the only source of enforcement, with fines for offenders.

Even knowing whether you are supposed to pay can be confusing. Many parents interviewed for this story had no idea where the financial threshold was. (You are responsible for paying taxes on any worker paid more than $1,600 in a calendar year.)

So why bother?

"Just knowing that we're not violating any laws," said Kristin Smith, a lawyer and mother of 8-month-old Fritz. Smith and her husband, Tom Sutton Nelthorpe, a financial journalist, pay their nanny a higher salary in exchange for taking out taxes.

But Smith said their nanny prefers to be paid on the books, and in this uncertain economy, is relieved she could claim unemployment if she had to be laid off.

"Also, I like the idea of setting up a professional relationship with your nanny," Smith said. "Otherwise, it's kind of like you're colluding with your nanny against the government. It sets it up to say that it's OK not to tell an authority figure about what you're doing. And if your nanny bumps the kid's head, you want them to tell you that."

The term "nanny tax" is really an umbrella for several taxes: Social Security and Medicare taxes and the federal unemployment tax. State unemployment tax and perhaps state disability tax may be owed as well. Rubin found the tax forms incredibly difficult and counterintuitive.

"It was expensive and time-consuming," she said. "I had to throw up my hands. It's not self-explanatory. There's no single resource, no place you could go that spells it out for you."

There are companies - like NannyTax in New York and the Nanny Tax Company in Chicago - that help navigate the complicated system of withholdings and taxes, but the services can cost $500 a year or more.

Alan Goldberg, a CPA and owner of NannyTax who files thousands of returns a year, stresses the importance of paying on the books. "When there is willful failure to file a return, the IRS is much less understanding," he said.

Edwards, mother of twin 3-year-olds, opted to do half on the books and half off, after a few years paying entirely on the books. Paying half-and-half allows the nanny to take home more money that would have gone to taxes. Edwards isn't too worried about the implications - she figures paying some tax will protect her, as long as she doesn't run for office.

But LaRowe Conover of the International Nanny Association, who was a nanny for 15 years, said the taxes are important to the child-care workers, too.

"Without them you have no proof of work," she said. "You can't refinance your home or get good health insurance."