[Editor’s note: Welcome to the Underground Economy series, which delves into the business of illicit, under-the-table, or otherwise accepted-but-not-quite industries. The previous installment explored the world of nannies and babysitters–check it out here. Today’s installment deals with nannies and babysitters!]
In households throughout America, individuals are hired for a variety of tasks. Some choose to perform these tasks as their primary line of work. Others do so as a part-time gig as a way to supplement income from other occupations. As a collective group, these domestic workers represent a sizable workforce in the country. In fact, together they have been estimated to comprise 5% of all employees in the nation. But despite this, it is not uncommon that tax filings for domestic workers be neglected. Many households simply fail to pay domestic worker taxes, resulting in a significant gap in tax revenue collections. And instead of getting better, this problem is growing.
When it comes to domestic workers, there are several types of jobs that fall within this category. Not only do domestic workers include nannies and babysitters. But they also include health aides and caregivers, maids and housekeepers, and even cooks and gardeners. In essence, any person hired within a household who makes a specific income figure is subject to domestic worker taxes. And failing to perform tax filings for domestic workers can have serious consequences. Regardless, only about a quarter of Americans (families and domestic workers) who are required to file do so. Based on this and their significant presence in the workforce, it is clear they comprise a notable part of the underground economy.
A Profile of the Modern Domestic Worker
Understanding the various roles domestic workers play in American homes, their demographic profile tends to be mixed. However, despite this, they do have some common features as a whole that’s worth noting. Overall, women comprise the largest segment of domestic workers, exceeding 92% of the total domestic workforce. Likewise, nearly half are foreign-born despite their racial ethnic groups representing a minority of the population. And while many suspect domestic workers to be young adults, the average age in the U.S. is 42 years. This is the age where most individuals peak in terms of their overall level of productivity. Thus, these details are important when considering deficient tax filings for domestic workers.
The profile described doesn’t mention the percentage of undocumented immigrants that fulfill these positions. In total, it is estimated that these individuals comprise about 22% of all domestic workers in the country. For families employing such immigrants, a practice of “don’t ask, don’t tell” is often embraced to avoid domestic worker taxes. But like any type of employer, these families have legal responsibilities when it comes to employee screening. At the same time, many undocumented immigrants worry that their tax filings for domestic workers will trigger legal actions. Though the IRS does not share these filings with immigration authorities, this still deters tax compliance.
Domestic Workers and the Underground Economy
When it comes to domestic workers, reports summarizing domestic worker taxes separate them into categories. In terms of specific numbers, maids and housekeepers represent the largest segment, totaling 834,000 workers or 46% of the group. The next largest group of domestic workers include nannies and babysitters who represent 30% of home employees. Lastly, health aides and miscellaneous occupations round out the totals at 16% and 1% respectively. If one adds up all of these categories, there looks to be around 1.8 million domestic workers in the country. And they work for some 3.8 million household employers. But according to IRS estimates, fewer than 25% actually have tax filings for domestic workers.
What does this mean in terms of the underground economy and lost tax revenues? The best sources of evidence date back to 2015 when investigated by an IRS project. In the report, the average earnings for a domestic worker were around $18,000 annually. Multiplying this by the estimated number of domestic workers yielded a total of $11.6 billion for that year. That would have typically provided about $1.84 billion in domestic worker taxes. But in reality, only a little more than half a billion was received. Rough numbers thus show that tax filings for domestic workers resulted in a revenue gap of $1.3 billion. That’s quite an impressive hit that the country took in 2015 in unpaid taxes as a result. And based on trends since, these figures today are even larger.
Domestic Worker Tax Requirements and Repercussions
When it comes to domestic workers, any household paying in excess of $2,400 annually to an employee must report that income. Once this threshold is exceeded, households are expected to pay employer taxes related to FICA and FUTA. These are withholdings that come out of domestic worker payments to cover Social Security, Medicare, and Unemployment Insurance. Together, these tax filings for domestic workers account for nearly 16% of all reported income. Thus, when domestic worker taxes aren’t filed, this reflects the tax revenue loss the nation experiences. Unfortunately, the vast majority of households and domestic workers choose not to comply with these requirements. And this places both groups at risk over time.
For families who choose not to report domestic worker payments, penalties do exist. Past employer taxes must naturally be paid. But at the same time, fines and penalties as well as potential criminal filings may result. In some cases, failing to perform tax filings for domestic workers can affect public reputation. This was the case in 1993 when Zoe Baird chose to withdraw her nomination for U.S. Attorney General. At the same time, domestic workers also take risks when ignoring domestic worker taxes. Without such verifiable income, they could well have difficulty getting loans or securing credit. They also lose out on potential credits applied toward Social Security and toward other social protections. This includes things like Worker’s Compensation coverage and Unemployment Insurance.
A Challenging Situation to Resolve
Given the shortcomings in tax filings for domestic workers, it’s clear a single solution doesn’t exist. Immigration policies factor into the equation and educating both families and domestic workers is essential. At the same time, oversight and enforcement needs to be improved. But a lack of resources severely limits this consideration at present at a government level. Finally, barriers to simple filing procedures for domestic worker taxes need to be removed. Filing requirements have been streamlined, but there is always room for improvement. In short, the solution is a complex one that will be multifaceted and involved. But given the lost tax revenues this underground economy segment is costs us, it is important solutions be pursued.