Innovative ways to stimulate the economy: Reform the nanny tax

This is just one of the Innovative Ways to Stimulate the Economy suggested by DailyFinance contributors.

Want to create more jobs and get millions of people who avoid taxes now to start paying into federal and state coffers? How about reforming the so-called nanny tax?

The tax laws around hiring childcare workers are notoriously difficult to comply with and easy to flout. Reforming them would be one small step toward stimulating the economy, but a giant step for household workers and the busy families that can afford to hire them, but find the maze of required paperwork too daunting.

So what does paying the nanny tax entail? Among other things, getting an employer ID number, then hiring an accountant to figure out withholding and the amounts you need to pay each quarter for Social Security and Medicare. There are unemployment taxes to pay and workers compensation insurance to purchase. If you mess up on any of these filings, you will be dinged with fines in the same way any business would be penalized for mishandling workers' mandated benefits.

For parents who are barely finding time to fulfill the demands of their jobs and spend time with their children, administering a one-employee human resources department at home is just too much. Hiring a service to handle the administration is expensive. It's no wonder that as few as 10 percent of families that hire a domestic worker comply with the law, according to estimates. This year, we've seen several potential presidential appointees tripped up on the laws, throwing their candidacy in peril.

My simple suggestion for fixing the problem is that families that hire full-time domestic workers pay a single annual flat fee to the government that is some simple percentage of the wages they pay their nanny. That amount would be distributed to other federal and state agencies -- just not by the parent. The household worker, now on the books, would be responsible for handling his or her own taxes in the same way any independent contractor is -- except now there would be a paper trail.

Given an easy way to comply with the law, I think more families would hire a full-time caregiver, which would create more jobs.

Even if you question that premise, there is no doubt that a simpler system would mean more babysitters would report their income, increasing tax revenues.

There could be ancillary benefits to working families from this rule change. Many people toss up their hands when confronted with the nanny tax dilemma -- do I deal with the paperwork hassle or hire someone who will work off the books? They turn instead to day care, which in places like New York is in short supply and extremely expensive -- especially if you have more than one child.

Day care is also, arguably, less convenient for working parents who then have to worry about finding back-up care when their children are sick and schlepping them to and from the center. That means lower productivity at the office (which is bad for the economy) and, I could even make a case, more well-educated professional women who leave the workforce (also bad for the economy).

Providing quality childcare in the United States is a thorny issue that leads inevitably to debates about whether children are best cared for at home with their mothers or why dads don't bear equal responsibility for childcare in most families. Maybe that's one reason that lawmakers haven't reformed this onerous and much-flouted series of regulations. But in these times of economic crisis, simplifying the nanny tax seems like an easy fix .

Do you think this would stimulate the economy? Tells us why, or share your stimulus ideas. And see more of our Innovative Ways to Stimulate the Economy.

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