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Clean up taxes the EZ way
Stories about "nanny tax" problems accompany every presidential transition, with much schadenfreude about the plight of those wealthy enough to pay people to perform their household work.
No doubt some appointees who didn't pay Social Security taxes for their household employees acted out of bad faith. Some may be genuinely surprised by the low level at which tax liability strikes. California tax liability starts when you pay someone $750 over a three-month period to work in your home, using your equipment and supplies; federal tax liability kicks in slightly higher, at $1,000 a quarter. For a housecleaner paid $150 a week, an employer owes about $1,600 a year to the federal and state government.
But we should not underestimate the number of people who, in good faith, would like to pay their appropriate share of taxes but are confused and frustrated by the obstacles government puts in their way. Given the difficulties, it is hard to believe the government really wants us to pay these taxes. Money is being left on the table.
Fortunately, government can make life better both for employers trying to meet their obligations and for low-wage workers seeking a secure future -- while also collecting more revenue.
Household employees have spread far beyond the wealthiest households as more Americans work more and harder and so seek outside help: child care, elder care, cleaning, cooking and gardening. Because much of the work is under the table, there are no solid numbers. But a 2005 study of Los Angeles by the Economic Roundtable, the most recent figures available, estimated the number of "informal" (i.e., non-reporting) household workers at 60,000. Assuming that a quarter of these could be moved to the formal economy, this reflects potential Social Security and Medicare tax receipts of about $40 million. And that is for only one U.S. county.
Of course, some workers do not want their pay reported. This may be because of immigration status -- although, nationally, nearly 80% of cleaners and child-care workers are legal U.S. residents, according to a 2007 Congressional Research Service report. Others fear losing benefits such as government health coverage, unavailable to the working poor.
And although many self-employed workers may not report income to avoid paying taxes, many would actually do better by reporting their income. Why? Because of the earned income tax credit. Estimates show billions of dollars in unclaimed EITC.
Although expanded health coverage for the working poor would expand the pool, there are already many workers eager to invest in their futures through Social Security, unemployment insurance and Medicare. And many employers would like to comply with the law, to meet their obligations and avoid the risk of exposure and embarrassment.
Under the current system, only the most dedicated will find a way to pay. California requires household employers to apply for an employer identification number and to mail quarterly reports of wages for household employees, with taxes due on Jan. 1 (calculated on another form).
Meanwhile, the Social Security Administration requires a different employer identification number -- a process that can take more time -- and a W-2 form for each employee. This form must be ordered either by mail or produced through Social Security's balky and user-unfriendly website, with yet another application process, phone calls for assistance and a confusing system for printing and transmitting the information.
Then there's the IRS, which requires a Schedule H tax form, thus obligating any employer to file a long-form 1040. Matters are more complicated yet for employers that withhold the employee's portion of taxes.
Much of this complexity is needless and can be resolved by simple coordination between states and the federal government. But much also comes from lumping household employers in with General Motors and McDonald's, which have accounting departments. This is ridiculous -- and gives many household employers the choice between noncompliance and hiring an expensive accounting service. Guess which they choose.
Instead, state revenue departments, the IRS and the Social Security Administration should together offer an "EZ Household Employer Tax" service that combines these burdens into a one-stop website. At year's end, taxpayers would simply log on to the website and enter the wages they had paid, with the Social Security numbers of their employees. The site could automatically send wage information to the employee and an invoice to the employer for the tax due so it could be added to the employer's state and federal returns, or the tax could be subtracted from a refund.
For employers withholding the employee's share of taxes, the EZ tax portal could provide escrow accounts, allowing taxpayers to pay electronically into this account on their preferred schedules. The interest the government would earn from these many small deposit accounts would more than pay for the service.
There's also the question of determining whether someone is a household employee, for whom you owe taxes, or a self-employed contractor (or contractor's employee), for whom you don't. Do you owe taxes for a housecleaner who uses her own vacuum but your cleaning products, or a gardening crew who use your lawn mower but their leaf blower? The government could treat all household employers (over the relevant wage level) as liable, unless the workers provide government-issued proof that they or another employer are responsible for all payroll taxes.
In short, if the government is serious about people paying their taxes, then it should make it easier for people to pay them. More important: If we want to support and value hard work, we need to bring the most vulnerable workers into the system as contributors and ultimate beneficiaries.
Christopher Kutz is a professor of law in the Jurisprudence & Social Policy Program at UC Berkeley Law School and director of the Kadish Center for Morality, Law & Public Affairs.