Want To Become (More) Libertarian? Try Hiring a Nanny

“It’s hard to hire people. It’s hard to fire people. A thicket of laws and regulations stand in the way. (Did you know there is a federal rule on how employees share tips?) We are now the Republic of HR. Try hiring a nanny legally.”

So said John Cochrane on 16^th January 2024.

Coincidentally, that very week I began the process of trying to hire a full-time nanny legally in DC. The Grumpy Economist is correct: the experience is enough to create libertarians. By the time you’re done with the endless forms, ID numbers, and contradictory government rules, you’ll be swearing fealty to Milton Friedman quicker than you can say “W4.”

First, you try to find a lovely soul with the right skillset and—minor detail—actual work authorization to be a household employee. You quickly realize that most candidates either can’t work legally or won’t agree to be paid on the books, even if they could.

When you eventually find a suitable, legal candidate and begin to research payroll companies, you’re told that before you can get going there’s some government forms the nanny must fill in to provide you with necessary information.

There’s a W4 to ascertain the appropriate federal tax withholding and an I-9, a form to show employment eligibility. Then, in our case, there was an exemption form for DC tax withholding because our chosen nanny lives in Virginia.

So far, so simple.

Well, next I needed a Federal Employer Identification Number (EIN) as a household employer. Easy-peasy, I thought. I’ll just hop on the relevant website on Saturday morning to get one. Well, no. Even though the number is electronically generated, seemingly instantly, you can only do this during Monday-Friday IRS office hours. And because Monday was MLK Day, we had to wait until Tuesday, 7am.

Armed with my shiny new EIN that Tuesday morning, I signed up for a nanny-specialist payroll service. I filled out a bunch of forms, including details about our household and the nanny’s likely schedule and withholding needs.

Then I tried adding my nanny’s personal details—and wham—I hit an error message: this payroll company didn’t have the capability of doing multistate tax filing. In case you missed it, I’m in D.C., the nanny’s in Virginia, and apparently crossing the Potomac to withhold the nanny’s income taxes while settling DC’s unemployment insurance needs is too big an ask for this well-rated website.

After considering the workarounds and the inconveniences this would have caused the nanny for her tax filing, we cut our losses and sprinted to a second payroll company. After more form-filling, it informed us that before payroll could be run and to avoid fees and penalties, we needed to also obtain tax IDs from DC and Virginia too.

I filled out the forms to register as a household employer in DC online, providing the same household and nanny details again. I reached a final page where it asked me how many people I employ who actually reside in DC.

The correct answer, given our nanny lives in Virginia, was “0.” When I put this in, however, it told me that I did not, in fact, need a tax ID, despite what the payroll company had claimed. What it did say is that I still needed to register with the DC Department of Employment Services to get a state unemployment insurance ID number.

So I fill many of those exact same details out again in another online form on the website of a different part of the DC government. At least, until I hit yet another roadblock. “Have you paid the employee more than $500 this quarter?” it asked, before requesting me to mark in the calendar when the nanny’s employment began.

Well, no, I haven’t paid her $500 yet because she hasn’t started work. There was my error: this state unemployment insurance ID can only be obtained once the household employee has already been paid over that $500 threshold for the quarter. Maybe the website might have told me about this technicality upfront, before I had wasted 20 minutes on the form?

Mercifully, obtaining the Virginia withholding tax ID was simple enough. Yet back on the payroll site there were still ! marks and “incomplete” badges next to almost all the details needed to run payroll, precisely because of the DC rules that delay you getting that information, or else exempt you from needing it.

Still, armed with all the IDs I could conceivably obtain, I filled out the new employee’s details and our withholding needs yet again for the payroll service. Multiple error messages remained.

This led to several anxious calls with the payroll service to try to make sure everything was as complete as possible before I needed to pay the nanny for the first time.

After some back and forth and assurances that all was well, they identified something that had indeed been missing. “Have you filled out the Virginia Power of Attorney form?” “Well, no I’ve only filled that which you asked of me….” I said. “OK, yes, actually we hadn’t processed some of what you’d submitted, but we do need to email you form 8655 for reporting authorization too!”

Federal Form 8655 arrived in my email inbox. It required more of the same household details for the umpteenth time and then asked which tax returns I was authorizing the reporting agent to file and to make deposits and payments for.

I’ve never seen this form before and so stared blankly at the page of seemingly random numbers associated with different forms that I was expected to select to ensure reporting and payments took place. After fairly fruitless searches online, I ran the form through ChatGPT to try to get an idea of what the hell the correct answers should be, given my situation.

I then called the payroll provider to cross-check whether I was along the right lines. They didn’t know, off hand, and dug around for an hour, later calling me back having examined a form of someone in the same situation of hiring a nanny across state lines. Thankfully, the LLM had been almost spot on, bar one change that had been made to the 2024 version of the federal form which ChatGPT hadn’t been programmed on.

At last, my payroll was set up (or so I assume)! All I have to do now is approve it two days before the first check is due and to mark my diary to obtain the state unemployment insurance ID after the first payroll has been delivered.

Still worried that I might have missed something, though, I dug around the payroll site and the web to check if there was anything more I needed to do legally before the nanny arrives next week.

Turns out there was. Firstly, I had to produce a “Notice of Hire Form” – basically a thin contract – for the nanny. That was no bother: in fact, I’d already put something together like this to make life easier for us in formalizing the verbal agreement we’d made.

But there are also two other things we are legally required to do:

1) Household employers are technically required to put up 29 pages of poster notices for employees detailing their rights at work, including DC laws on discrimination, the minimum wage, paid family leave, time off to vote, and much more, that would make your living room look like the notice board at the Department of Labor canteen;

2) Households must also obtain workers’ compensation insurance, which is another cost running into many hundreds of dollars to cover the risk of employee injury in your own home.

Not complying with any of the above rules, of course, can trigger tens of thousands of dollars in fines and penalties.

Now, keep in mind, all this Kafkaesque rigmarole was for the simple act of paying someone to look after my child in my own home legally. We’re not talking about founding a multi-state corporation or building the next space rocket. This was just for a nanny.

My colleague Adam Michel has previously advocated for loosening independent contractor rules to incorporate nannies to make this process easier for households. He is one of DC’s premier tax policy experts and even he found the whole payroll sign-up process confusing.

Yet mainly I’ve just left this experience more in awe of small business owners who have to run complex organizations following numerous industry-specific regulations, as well as these payroll demands.

After navigating a labyrinth of forms, IDs, and websites, I suspect anyone would become a bit more libertarian, or at least a bit more “Grumpy Economist.”