There are many reasons why a family could need to let go of their nanny—most likely they’re stressful ones. However, there could be another curveball coming: your out-of-work nanny filing for unemployment.
How Does Unemployment Work?
Think of unemployment as community work insurance. When employers pay employees, they also pay state and federal taxes (FUTA) that go toward the federal-state unemployment insurance program. In a few states, employees also contribute to unemployment programs. This money is then available to people who are out of work as a temporary partial-replacement of their income until they’re able to regain employment.
Who’s Eligible For Unemployment?
Unemployment isn’t available to people who leave their job voluntarily, looking for their first job, or re-entering the labor force after having left it voluntarily. Traditionally, self-employed and gig workers aren’t eligible because their employers don’t pay unemployment taxes.
Unfortunately, some families think nannies and babysitters fall into that self-employed/gig worker description and tend to not consider themselves as employers when they utilize in-home child care. They, therefore, end up paying their caregivers under the table to avoid the work and related taxes.
What Happens If My Nanny Files For Unemployment?
I’ve Been Paying My Nanny Legally
If you‘ve been paying your nanny legally and they file for unemployment, all you really need to worry about is responding to any notifications from your state’s labor agency. You may need to provide information like:
- Why your nanny was let go.
- Any compensation (like a severance or payout of unused PTO) above and beyond their typical wages.
This all needs to be reported to the state as it impacts the benefits your former employee can receive.
I’ve Been Paying My Nanny Under the Table
By paying “under the table,” you’ve avoided contributing federal and state unemployment taxes.
When your nanny files for unemployment, they’ll need to list their most recent employers. If you’re on that list, your state’s labor agency will soon realize that you haven’t been contributing unemployment taxes. This means that you could face:
- Thousands of dollars in failure-to-file penalties from your state.
- Additional fines from the IRS.
- Paying back the taxes you owe.
- Other taxes – like Social Security and Medicare – that you haven’t been remitting and assessed additional fines and penalties while you pay back the tax amount you owed.
Getting discovered paying your nanny illegally is a financial mess no family wants to find themselves engulfed in.
- You have a couple of choices if you have been paying your nanny illegally.
You could continue to give them their regular pay even though they aren’t working for you and avoid having them file for unemployment.
- Another option is to catch up on your back taxes and get compliant. Our payroll partner, GTM Payroll Services, understands the position that families are in right now. Call them at (833) 796-1515 and they can work with you to get up to date on your tax obligations. Once you’re caught up, your nanny will be eligible for unemployment as well as a few other paid leave benefits.
The Benefits of Nannies Being Paid Legally
Benefits for the Employing Family
- Avoid the risk of paying fines, penalties, employee lawsuits, audits, and more.
- Take advantage of the Dependent Care FSA.
- Access to the Child and Dependent Care Tax Credit.
Benefits for the Employed Caregiver
- Having a verifiable income and legal employment history (needed for loans, credit, social security, medicare).
- Receiving unemployment benefits.
- Eligible for a healthcare subsidy.
The Big Picture
As a parent just looking for some child care help, it can be difficult to shift your thinking to see yourself as an employer. We get it. However, the reality is that nannies and babysitters have careers that are committed to the care and development of our kids. The more we can honor caregivers as professionals—particularly in the way they’re compensated—the more that quality will be invested directly into our kids.