The COVID-19 pandemic has brought on an unsettled time for many families with young children. You’re likely dealing with a lot of stress in both your professional and personal lives—while also managing more child care than ever before. 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 they don’t pay unemployment taxes. However, under recent federal legislation aimed to help those out of work during the COVID-19 pandemic, these types of workers can apply for unemployment.
Unfortunately, nannies and babysitters typically fall into that self-employed/gig worker description. Families tend to not think of themselves as employers when they utilize in-home child care, and 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.
If you let your nanny go during the COVID-19 pandemic, they may not be eligible for unemployment benefits including the additional $600/week the federal government is kicking in through the end of July due to the COVID-19 pandemic.
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—especially during a global pandemic. And now it’s easier than ever to get caught as nannies join the millions of other Americans applying for unemployment benefits.
- 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 (800) 929-9213 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.
Utilize Families First Coronavirus Response Act (FFCRA) benefits
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).
- Take advantage of paid leave benefits offered through the Families First Coronavirus Response Act (FFCRA).
- Be eligible for paid leave If they need to quarantine or isolate due to COVID-19, need to care for someone who is quarantined or isolated, or care for a child who is home due to a school or daycare closure.
- 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.