Avoiding the Nanny Tax Can Cost You...In More Ways Than One!

More parents are avoiding the nanny tax to save money, only to draw the scrutiny of tax regulators if they later get laid off and file for unemployment benefits, according to an article that ran last week in the he Wall Street Journal . The Internal Revenue Service indicated that household-employment tax filings for nannies and other domestic workers fell 10 percent in the five years ending in 2006--a period when the number of domestic employees actually rose. Since 1996, filings are down 26 percent, according to statistics from the Labor Department.

As the article points out, it is never wise to evade taxes, but particularly so now with a slumping economy and job cuts. If a family's income is reduced, then a household employee may be the first expense to go. The laws do enable parents to set aside up to $5,000 in pre-tax income for child-care expenses. More importantly, it provides the nanny with Social Security and Medicare benefits. It's the law, and it's the right thing to do!