Underground economy getting fresh attention Taxes go unpaid for sitters, cleaners

February 09, 1993|By Ann LoLordo | Ann LoLordo,Staff Writer

'TC If you pay a baby sitter, a housekeeper or the kid who mows your lawn more than $50 in a three-month period, get out your checkbook -- you also should be paying Uncle Sam taxes to cover their future Social Security benefits.

If you haven't been paying these taxes, you're far from alone. Federal officials estimate that the required taxes for as many as 1.5 million domestic workers are going unpaid.

Perhaps the most distinguished member of this club to step forward recently was Commerce Secretary Ronald H. Brown, who admitted on national television this weekend that he only recently paid Social Security taxes for a woman who cleans his house several hours a week.

The hubbub in Washington that began over nannies who are illegal aliens and has broadened to include cleaning ladies who get paid in cash is calling attention to America's underground economy.

Hundreds of thousands of people make up this work force and elude the laws regarding employment and Social Security taxes. They may include an Irish student here on a tourist visa working illegally as a New York barmaid or a Dundalk mother of two looking to supplement her income by cleaning houses.

"We have always assumed the underground economy has been something illegal dealing with drugs or illegal workers," said Mitchell L. Moss, a professor of urban planning at New York University.

"As unemployment has grown, as large firms have laid people off, people are becoming more entrepreneurial, and they are able to bypass the normal sources of employment and avoid tax exposure. You can't understand the underground economy without understanding the enormous contribution federal agencies have made to create incentives to participate in the underground economy. The paperwork requirements have become so onerous."

Under present law, who pays the tax and the amount owed depends on the work situation. For example, if a Baltimore couple hires a woman to take care of a child in their home and pays her more than $50 a quarter, they are required to pay Social Security taxes that equal 7.65 percent of the worker's income. The worker must match that amount, according to Philip A. Gambino, a spokesman for the Social Security Administration in Woodlawn.

But if that same Baltimore couple wanted to hire a cleaning lady, the tax situation would depend on whether the cleaning lady was in fact an "employee" or an "independent contractor."

"If the employer controls the working conditions, provides the equipment, tools, mops, brooms, whatever and sets the hours and days, the person would be considered an employee," said Domenic J. LaPonzina, a spokesman for the Baltimore office of the Internal Revenue Service.

"Independent contractors would buy and bring their own supplies, set their own fees and schedule the work days. If, in fact, you are dealing with an independent contractor, the employer would not be responsible for" paying the taxes, the contractor would.

Neither the IRS office here nor in Washington has reported an increase in calls on this issue that they can attribute to a growing public concern about complying with these laws. Breaking the laws is a civil offense, not a criminal one.

"It's not like high sums of income taxes are going into the underground economy because many of the domestic workers work one day a week here, one day a work there, and at the end of the year, still haven't made enough to require a filing of a return," said Mr. LaPonzina.

More than a year ago, federal officials sought to change the law, to raise the $50 threshold amount -- set back in 1950 -- that triggers payment of Social Security taxes for domestic help and to reduce the reams of paperwork involved with paying the tax. The idea was to simplify the process, and it was hoped, encourage more people to comply.

But former President George Bush vetoed legislation that had the proposed changes in it. Now, proponents for simplifying the process, such as Rep. Andrew Jacobs Jr., D-Indiana, are starting again. The House Ways and Means' subcommittee on Social Security, which Mr. Jacobs chairs, plans to hold a hearing on the issue next month.

Mr. Jacobs said aspects of the law are arcane and don't reflect how people live today. For example, should a couple who pay a baby sitter more than $50 in a three-month period be responsible for Social Security taxes in the same way a couple who employ a maid five days a week are responsible?

Mr. Jacobs and his subcommittee have proposed the following changes to simplify the process: employers would file annually instead of quarterly, the threshold would be increased from $50 a quarter to $300 a year and an employer would be able to file the taxes for domestic help on his own income tax form and pay it as part of his annual income tax bill.

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