The Price of Obeying the Law

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For millions of Americans who hire even occasional household help, the rules that tripped up Zoe Baird can be the laws from hell. The requirement that immigrants have U.S. working papers is just part of the problem. The real burden for people hiring anyone, from nannies and baby-sitters to once-a-week household help, for more than $50 in a three-month period is the taxes and the blizzard of paperwork that also come through the door. So stringent are the legal requirements that the Internal Revenue Service estimates that no more than one-quarter of American families with household help bother to obey the law -- and that assessment is probably generous.

Such honor-bound people typically pay more for help than their tax-dodging neighbors, and their workers pocket less money. For example, a family that pays a nanny $250 a week must add $15.50 for Social Security taxes. The worker would likewise pay $15.50, plus $3.62 in Medicare taxes, not to mention federal and state income taxes. "It's very expensive to be on the books," says a New York City mother who does not pay the Social Security taxes. "I already pay $1,200 a month in child care. How can I pay more?"

Paying the taxes is only part of the hassle. Conscientious families must fill out five federal forms a year on behalf of each worker. State and local filings can add to the burden. Overwhelmed families may seek help from accountants, who will gladly handle the paperwork for about $500 a year for a child-care worker. But even professionals can find the task grueling. Says Donald Rocen, a tax manager in the Washington office of accounting firm Coopers & Lybrand: "I wanted to do the right thing, and when I hired a cleaning person for $50 a day once every two weeks, I complied with all the regulations. But it was such a pain that I decided to use a cleaning service instead."

The IRS acknowledges that the red tape has got out of hand. Former IRS Commissioner Fred Goldberg called in 1991 for a single federal form to replace the five documents that are required. And instead of having to write out separate checks, he said, families with household help should be able to pay the taxes through their own withholding schedules or estimated-tax payments. But while Goldberg predicted that such changes would "result in a significant improvement in voluntary compliance," the proposals have languished in Congress.

Catching cheaters is another problem for the IRS because the agency does not ask citizens whether they employ household workers. But tax dodgers are sometimes snared when domestics retire and apply for Social Security benefits, only to find that they cannot collect because their employers never paid the taxes. The dismayed workers then often turn in their miscreant bosses. The penalty for cheating can be twice the amount of the overdue taxes plus interest.