Confessions of an honest tax filer (and why the system is absurd)

Curse my honesty.

I generally try to do the right thing because, well, it’s the right thing to do, but certainly when tax law is involved.

So my wife and I didn’t give much thought to legally employing a nanny to watch our baby. Now I’m wondering what it’s like to have the kind of conscience that’s comfortable hiding thousands of dollars from the IRS, like, you know, a lot of people do.

About a year ago our baby joined the ranks of 21 million U.S. children who have some sort of child care arrangement. We needed help only a handful of hours a week, but given the market rate of a good nanny in Salt Lake City, that was enough to send her wages over the $2,200 ceiling for tax-exempt work.

So we registered as household employers; easy enough. Oh, we need to pay unemployment insurance? Oops. Thankfully the Department of Workforce Services forgave our ignorance, and we paid up. 

OK, tax season 2021. Guess we need to file a W-2 … wait, how do we calculate FICA contributions? Ah, there’s a Schedule H for that (what the heck is a schedule?). Now I’m desperately googling if I live in a “credit reduction state” (I don’t) because the only credit reduction state in 2020 was actually not a state (the Virgin Islands) so why doesn’t the form just ask if I live in the Virgin Islands? Whoops! Forgot to fill in line 8c (never mind lines 5-7 or 8d-i).

Once our blood pressures drop, my wife and I will fill out Form 2441 on which we claim a tax credit for being household employers of a nanny. Just to put that plainly: We pay the government payroll taxes so that we can pay a nanny on the books so that the government can give us money back for paying a nanny. 

Middle school busy work has nothing on the federal government.

Even with 1¹⁄₂ master’s degrees between us, my wife and I couldn’t have done what we needed to without the advice of an accountant friend who’s been in our shoes, and even then I’m not convinced we won’t get audited for some silly mistake I made. 

It shouldn’t surprise you, then, that most people don’t follow the law. Data on the number of parents paying child care providers off the books is scarce, but at least one survey of parents in a New York City neighborhood found 63% of households paid their nannies under the table, and only 15% paid completely on the books.

One Utah tax preparer I spoke with said she could recall only one instance of a client needing to prepare nanny tax forms in her 19 years of work.

What my wife and I experienced was a rite of passage that puts us in the company of roughly 99.9% of working Americans who delight in loathing the IRS. In our case, we found the system to be neither pro-family nor pro-honesty. New parents work hard enough without having to worry about completing tax forms with the precision of a surgeon.

Is there software that could have helped us? Yes, but relying on the companies who make it may be part of the problem.

Gaming the government

Tax prep companies, like heavy hitters Intuit (owner of TurboTax) and H&R Block, have lobbied — successfully — against a federally managed filing framework. Their efforts boil down to an “anti-encroachment” strategy: They struck a deal to offer free tax filing for low-income Americans in exchange for the IRS promising to not create a free, government-run system, according to investigative reports by ProPublica.

Associated Press

The IRS, the argument goes, shouldn’t be both the tax collector and the tax preparer since that would lead to conflicts of interest. But the alternative of sanctioning a few private companies to do the work is fraught with issues.

As the internet advanced around the turn of the century, the government saw the writing on the wall. It could save money by not processing paper tax returns, and setting up a simple e-file system would be a blessing to working Americans.

Intuit and others fought back, eventually reaching the aforementioned deal. The resulting IRS Free File program allowed member companies of the Free File Alliance to offer free tax prep to low-wage earners. The income cap has increased in recent years to $72,000 for a household, but some member companies independently set their income caps as low as $39,000 or include age limits that reduce the eligibility of filers. State returns usually cost extra, too.

Additionally, relatively few Americans use the program or know that it exists. At one point, TurboTax hid its Free File landing page from Google searches so that one had to know exactly how to navigate its website to find the offer, according to ProPublica.

Adding to the confusion, TurboTax launched its own “Free Edition” in the mid 2000s. In concept it mirrors the federal program except that Intuit has complete control over marketing and presentation. Navigate to the TurboTax website and one is bombarded with the advertisement “free guaranteed.” The fine print says otherwise: It’s only available to those with a “simple” tax return, which excludes itemized deductions, rental property income or the Student Loan Interest Deduction, among other items.

Many taxpayers who click TurboTax’s “Start for free button” find themselves upgrading in order to accommodate different forms or deductions. The next step up costs $60, but plans can soar north of $200 if you have a complex return and choose to have a “live” expert help you. Intuit tries to upsell its customers at every step of the way, promising to “maximize deductions” or protect them against an audit.

According to internal documents obtained by ProPublica, a recent company analysis of customer service calls found nearly 7,000 conversations included the phrase, “supposed to be free.”

Remember in 2016 when House Speaker Paul Ryan said we could file our taxes on a postcard? It’s not a fantasy; our industrialized neighbors have free and simple tax return processes. In places like Japan, modernized systems take from each paycheck the exact amount you owe the government — no yearly guesswork on withholdings. Approximately 80% of Japanese workers need only review a postcard-sized statement each year and let the government automatically make adjustments, according to journalist T.R. Reid.

Adopting that system in the U.S. would devastate companies like Intuit, whose TurboTax software was used by 40 million Americans in 2019. As Mark Forman, a former official at the Office of Management and Budget, said simply, it’s an industry “that lives off the complexity of the tax code.”

A distant hope

Here, I recognize the efforts of tax prep companies aren’t directly responsible for our nanny woes. We were obligated to become employers, and that adds layers of complexity regardless of how easy it is to file income taxes.

But those two worlds don’t operate in isolation — improvements to the tax code and filing systems could streamline operations for employers, the least of which are people like ourselves who don’t hire child care providers with an entrepreneurial mindset. A business owner knows that setting up shop comes with a string of legal requirements. Working parents, on the other hand, just want a babysitter and may not realize how innocent actions can land them in trouble.

Why not push for universal child care while the tax code sorts itself out? That may help parents avoid a tax headache, but it wouldn’t be the panacea some hope for. Leading voices on family policy, like Brad Wilcox at the University of Virginia, have documented the failures of universal care programs in other nations, some of which have increased childhood misbehavior and anxieties. Far better, he says, to offer parents cash payments and let them decide what the best arrangement is for their families.

Which means parents would still be spending money on in-home child care providers, which means our tax problems won’t go away.

The bottom line is our filing system is absurd, and it’s particularly unkind to families. Yet, it’s one we’ve grown complacent with, probably because it sends us spiraling but only once a year. Even the Trump administration, which muscled through the most sweeping tax reform since Ronald Reagan and made the forms simpler, couldn’t deliver on the promise of free and easy filing. And it’s less than a distant hope to expect President Biden’s team to make it a priority.

Still, for the sake of American families (to say nothing of keeping pace with the modern world) it needs to happen. In the meantime, I’ll be happy to walk you through your nanny taxes.

That will be $60, please.