As a household worker, you should view yourself – and demand to be treated – as
a professional. Part of being a professional is being paid legally. Yes, there are
taxes, but the taxes provide you with several very important benefits and protections.
Why Being Legal is Being Smart
Below are some of the benefits and protections you’ll receive if you’re paid as
Employment History. Being legal creates an employment history that
is critical to daily life. An employment history is required for a car loan, a mortgage,
a student loan, a credit card application, a health insurance application, an auto
insurance application, future job applications, etc. If your employment is not documented,
it is as if you do not work.
Unemployment Insurance. When paid legally, you are entitled to
receive approximately 50% of your salary for up to six months if you lose your job
due to no fault of your own. This benefit is free to you, as your employer pays
the cost of the program.
Social Security/Medicare Benefits. When you retire, you’ll receive
money for living and medical expenses. How much you receive is based on how much
is paid into your Social Security account. When paid as a professional, your employer
matches your retirement contributions on a dollar-for-dollar basis. Those paid illegally
don’t get any retirement benefits, which means they’ll never be able to stop working.
A Real Life Example: Barb earns approximately $30,000
per year. During her entire career she contributes about $40,000 to Social Security.
During retirement, she will receive approximately $175,000 in Social Security benefits,
assuming she lives until age 85. Because of the matching contributions from her
employer – and interest – she’s able to collect almost 5 times as much as she put
in during her working years!
Professionals negotiate their compensation based on “gross wages” (before taxes)
rather than “net pay” (after taxes). Here’s an example:
Mary has determined that she needs a net (“take-home”) pay of about $500 a week.
Using Form W-4, she assesses herself as Single with 2 allowances and uses our Employee Paycheck Calculator to
convert her Net Pay into Gross Wages. Mary asks for a gross wage of $630 per week.
Her paycheck looks like this:
Gross Weekly Wage:
Social Security & Medicare
Federal Income Tax
State Income Tax
Total Tax Withholdings
With this pay structure, Mary is entitled to all benefits and protections under
If Mary had been paid in cash (“off the books”), she would still owe the state and
federal income tax, but she would not be entitled to unemployment or retirement
benefits because her employer did not report her wages or pay any employer taxes.
If Mary had been paid as an “independent contractor” (Form 1099), she would owe
all the taxes listed above plus an additional $48.20 per week (roughly $2,500 per
year) because independent contractors have to pay both the employee and employer
portions of the Social Security & Medicare taxes.
Being legal is not only the law, it also provides significant benefits — which you
as a professional richly deserve. So don’t think of it as a tax bill. Think of it
as an investment in your financial future.