Morse Reviews Taxing Nannies By Kleiman, Sarkar & Satterthwaite

Susan Morse (Texas; Google Scholar), Going Formal: The Tax Lives Of Nannies (JOTWELL) (reviewing Ariel Jurow Kleiman (Loyola-L.A.; Google Scholar), Shayak Sarkar (UC-Davis; Google Scholar) & Emily Satterthwaite (Georgetown; Google Scholar), Taxing Nannies (reviewed by Michelle Layser (San Diego; Google Scholar) here)):

Workers who provide child care in children’ homes—that is, nannies—should almost always be “formal” workers based on existing law. But in fact they are almost always treated as “informal” workers paid off the books and not as employees. Formality would mean more work law protection – that is, from labor, employment, and social insurance law. But it would also mean more income and payroll taxes.

Is going formal worth it?

In Taxing Nannies, Ariel Jurow Kleiman, Shayak Sarkar, and Emily Satterthwaite consider this question from an obvious yet original perspective. They focus on the preferences and welfare of nannies, not hirers. Their empirical work shows that some nannies strongly prefer formality. It also suggests that the market assumes informality and quotes compensation on an after-tax basis. A tax incidence negotiation between nannies and hirers results over how to split the tax burden of going formal, and diverse solutions follow.

The authors analyzed data from the online platform Reddit, using a strategy similar to that used by Shu-Yi Oei and Diane Ring to investigate the tax lives of rideshare drivers. Kleiman, Sarkar, and Satterthwaite examined about three hundred posts from the “r/nanny” subreddit. ...

The evidence presented by the paper shows that some nannies prefer formal arrangements, and that these preferences may also assume that hirers will bear the resulting tax burden. But the paper also presents evidence of nanny-hirer negotiations, which shows that going formal often requires nannies, as well as hirers, to bear some of the burden of the increase in tax. The work law protections may come at a price, counter to the assumptions of at least some proponents of greater enforcement and formality.