Nannies play an important role in the childcare system, helping many moderate-to-high income women pursue careers in fields like business, medicine, law, and politics. Research on the tax behavior of parent-hirers of nannies has raised significant concerns about noncompliance, and it would be easy to conclude that most nannies (and the parents they work for) prefer to keep their payments “under the table.” A new study by Professors Ariel Jurow Kleiman, Shayak Sarkar, and Emily Satterthwaite suggests that the tax reporting preferences of nannies and their employers are considerably more nuanced. While many nannies do prefer to receive pay under the table, others prefer formal employee status. The authors argue that understanding these preferences—and the reasons behind them—is key to crafting effective and equitable nanny tax reforms.

The authors employ three empirical methods to investigate the tax reporting preferences of nannies. These included a survey of nannies, a content analysis of an online message board used by nannies, and interviews with experts from organizations that work with nannies. Though each method had limitations as a stand-alone study, together they allowed the authors to triangulate findings and fill in gaps. Where previous studies had focused on tax compliance by nannies’ employers, the authors study was designed to interrogate the preferences of nannies themselves. Some of the findings were surprising. 

For the survey, the authors recruited nannies by posting QR codes in parks in Los Angeles Country and by soliciting responses from attendees of the Nannypalooza conference in Washington, D.C. The survey sample included 57 geographically diverse respondents. Compared to the national population of nannies, the nannies surveyed were more likely to be white, born in the U.S., and to possess a social security number. They were also better paid, reporting an average wage rate of $29 per hour, as compared to the national average of $12 to $15. Among this subgroup of nannies, the vast majority preferred “formal employment and payment and also used strong language concerning law and taxation to explain their preferences.” In other words, these nannies did not want to be paid under the table.

Next, the authors performed a content analysis of message board conversations posted on a nanny forum hosted by Reddit. The authors analyzed 154 posts in which nannies expressed preferences as to their worker classification. Unlike the survey respondents, many of the nannies posting on Reddit were not being classified as employees by their current employers. Instead, they were receiving cash under the table, and their comments suggested that they were not currently reporting all of their income to the IRS. Nevertheless, like the survey respondents, the Reddit users in this sample overwhelmingly expressed a preference to be classified as employees (81 percent).

Why would these nannies—many of whom were currently avoiding taxes by accepting payment under the table—prefer to be classified as employees and subject to wage reporting and withholding regimes?  Though some pointed to a need for documentation to secure rental housing or future benefits, most simply said it’s the law. They are right, of course: nannies should be classified as employees. But it would be reasonable to wonder why nannies would be more concerned about legal compliance than their parent-employers, many of whom resisted classifying them as employees. Tax and regulatory burdens probably explain many parents’ reluctance to classify their nannies as employees. Still, does it make sense that nannies would strongly prefer a legal arrangement, even though it means higher tax burdens, while employers resist the classification merely to avoid regulatory burdens?

The scenario is a bit puzzling at first, but there is an explanation. The content analysis revealed “what appears to be something of a norm or expectation in the nanny industry: wages are quoted as ‘take-home’ or after-tax (net) amounts,” and “nannies may expect to be ‘grossed up’ for the withheld taxes.” The upshot is that many nannies on Reddit would have preferred to shift to employee classification because it’s the law and has various ancillary benefits, but also because they assume it will not affect their bottom line—even if their current practice is to evade taxes. Meanwhile, their parent employers may resist the classification not only because it increases their compliance burdens, but also because it would effectively force them to increase their nannies’ wages.

The survey and Reddit discussion yield fascinating insights into the preferences, expectations, and tax literacy of many nannies. However, the populations observed through these studies may not be representative or generalizable to the broader population of nannies. For this reason, the authors also interviewed experts in the field. These experts largely confirmed the more conventional wisdom: many nannies do prefer to be paid under the table. The experts believed that some nannies may simply want to keep more of their wages by avoiding taxes (but the Reddit study casts some doubt on that explanation, because many nannies assume their employers would bear the tax burdens for them). The experts also observed that many undocumented nannies worry that employee classification and tax reporting would increase their risk of detection by immigration authorities. They also noted that some nannies avoid reporting some of their wages to maintain eligibility for means-tested welfare benefits.

Based on the foregoing, the authors have proposed several reforms that could help reduce barriers to classifying nannies as employees. First, they recommend steps to streamline the reporting process to reduce the compliance burdens placed on parent-employers. To the extent that parent-employers resist nannies’ preferences for employee classification to avoid compliance burdens, simplification could remove a barrier. Second, they recommend immigration reforms that would “bring informal workers out of the shadows.”  Third, they recommend reforms to “means-tested public benefit programs with the recognition that benefits cliffs lead to underreporting.” These reforms may help reduce conflicts between nannies and their employers, and they may remove barriers that prevent some nannies from urging parents to classify them as employees. The authors did not recommend policies to increase tax literacy among nannies and their employers, but their research suggests that such interventions may also help avoid miscommunications and reduce conflicts between nannies and their parent hirers.

I recommend this article to anyone interested in tax compliance, gender and tax law, and the taxation of vulnerable groups.