BABY-SITTING CAN BE A RISKY BUSINESS IRS CAN COME AFTER PARENTS IF THEY DON'T PAY THE NANNY TAX.

Byline: Barbara Correa

Staff Writer

It's every neighborhood's dirty little secret. Mom and Dad both work, they have a full-time nanny, and they pay her under the table. So what?

Employing a nanny without reporting and paying taxes on her income can end up costing big money, that's what.

But like so many risks we take when filing our income taxes, paying our nanny under the table is deeply ingrained in the culture, and most of us don't think twice about it.

"People don't think they can be caught. They think that what (the government) doesn't know won't hurt them," said Eva Rosenberg, an accountant and enrolled agent in Northridge who runs TaxMama.com, a tax advice Web site.

And people don't get caught, most of the time.

"IRS computer systems are not set up just to check for the nanny tax," said Michael Rozbruch, a tax resolution specialist in Encino. "They have much bigger fish to fry."

Most parents go on paying their nanny and not worrying about tax ramifications, which works just fine -- until something goes wrong.

For example, what if a parent decides to lay off a nanny, or the nanny gets hurt on the job? Rosenberg had one client who fired her nanny, and the nanny then went straight to the state Employment Development Department and filed a claim for unemployment compensation. The agency assessed the employer taxes, penalties and interest going back years and reported them to the Internal Revenue Service as well.

"Since no payroll tax returns had ever been filed, there is no statute of limitations," Rosenberg said. "They can go back forever. It could be nasty."

"Nannygate" became a household word during the first Clinton administration when attorney general nominee Zoe Baird became the first high-profile American to come under scrutiny for paying her domestic help under the table. Baird eventually withdrew her name from the nomination.

More recently, President Bush's pick for Homeland Security secretary, Bernard Kerik, stepped down after admitting he employed an undocumented immigrant as a nanny. Now, however, the term is more often used to describe a male celebrity's amorous pursuits with an au pair.

The biggest reason parents don't pay nannies over the table is because of the extra cost. For a nanny making $600 a week, withholding for Social Security taxes and for federal and state income taxes adds up to more than $5,000 a year.

Parents who think they can make that up by paying the taxes and then claiming a tax credit for the expenses will be disappointed.

For taxpayers making $43,000 and up, the maximum federal tax credit the government allows is $1,200, said Victor Omelczenko, Los Angeles spokesman for the IRS. Even for lower-income people, the child-care tax credit caps out at $2,100, so parents who get to claim the full credit are still better off financially if they pay the nanny under the table.

Another big reason why so many parents fail to pay nanny taxes is that it's tough to find a nanny willing to work above the table.

"They don't care what the pay is. They only care what the after-tax pay is," said Jennifer Brockett, a business-litigation attorney who does withhold and pay taxes for her nanny. "We had to interview 35 nannies a few years ago mostly because it was over the table. It messes with the salaries because the culture here is so under the table."

To satisfy her curiosity, Brockett posted a survey on a popular parenting message board awhile ago about nannies and taxes. Among respondents to the unscientific survey, just one in four was reporting the nanny's income and withholding taxes.

Monica, a marketing executive in Glendale who does not pay her nanny tax and spoke on condition of anonymity, said she's been thinking about coming over to the right side of the tax law.

"I haven't made the leap," she said. "I always mean to look it up, but I don't take action."

Still, she said, the hassle factor of filling out and filing paperwork on the nanny income comes in second only to the added expense.

But she said paying extra might be worth the peace of mind of being straight with the IRS.

"My nanny doesn't want to work over the table, but if I came to her and explained that we need to pay these taxes, I think she would swallow it and pay. I don't think she would leave."

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JUST THE FACTS

A nanny taking care of your children in your home - whether full time or part time - is your employee.

If you pay your nanny more than $1,500 a year, you are required to withhold and pay Social Security, Medicare, income, disability and unemployment taxes.

If the IRS discovers that the income has not been reported and taxes have not been withheld, the employer could be on the hook for the taxes, disability and unemployment. For a nanny making $600 a week, the Social Security taxes alone would add up to about $25,000 over five years, and that doesn't include penalties and interest.

Most nanny-tax evasion is caught as part of a larger audit, or when a nanny is fired or hurt on the job and goes to the state for compensation.

SOURCES: Internal Revenue Service; Daily News research

ON THE WEB

www.irs.gov/publications/p926/index.html (Household Employers Tax Guide)

www.nannynetwork.com/NannyTax/index.cfm

www.4nannytaxes.com

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(1) JUST THE FACTS (see text)

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