Why You Shouldn’t Pay Your Nanny Under the Table

For many working parents, nannies are an essential piece of the childcare puzzle. The right nanny can help with everything from changing diapers to handling school pick-ups and drop-offs. They can come to feel like part of the family, but it’s important to remember that they’re technically your employee—at least that’s how the IRS sees it. Paying your nanny under the table could result in serious fines and put you in legal hot water.  

There are other good reasons to keep their pay on the up and up. Doing so unlocks a number of perks for household employees, like the ability to collect unemployment and Social Security benefits. They can also report this income when applying for new loans, including mortgages, as well as lines of credit. 

In other words, paying them correctly is a win-win for everybody. 

How to Pay Your Nanny the Right Way

The cost of employing a nanny varies widely depending on where you live, how many kids you have, and the childcare worker’s experience and qualifications. With that said, CostHelper puts the average expense at $400 to $1,000 or more per week.

Below is a high-level view of how to pay your nanny on the books. If you don’t want to handle the nitty-gritty details yourself, consider working with an accountant or opting for an all-in-one payroll service provider designed for household employees, like Care.com’s HomePay. They can take these tasks off your shoulders while keeping you in compliance with federal and state laws. 

Get Your Tax IDs in Order and File a New-Hire Report

To file your tax returns, you’ll need to obtain federal and state tax ID numbers. Even if you live somewhere that doesn’t levy state income tax, your state tax ID is still required. Research the process for getting it done in your state. Once you do hire a nanny, you’ll also need to document it by filing a state report. 

Provide Your Nanny With the Right New-Hire Paperwork

  • Form I-9: This verifies their eligibility to work

  • Form W-4: This clarifies their federal tax withholding. (If they’re responsible for state income tax, they’ll need to fill out a separate form as well. Check with your state to clarify what’s required.)

Withhold Necessary Taxes From Their Paychecks

  • Federal income taxes: Your nanny’s W-4 form will spell out how much to withhold. You may also need to withhold state income taxes, depending on where you live. 

  • Social Security taxes: 6.2% of your nanny’s gross pay 

  • Medicare taxes: 1.45% of your nanny’s gross pay

In addition to withholding Social Security and Medicare taxes, you’ll also have to pay an equal share as the employer. This amounts to 7.65%. You’ll bundle it all together and pay quarterly estimated tax payments. 

Pay Unemployment Tax 

If your nanny’s wages exceed $1,000 during any calendar quarter, you’ll likely have to pay a 6% federal unemployment tax on the first $7,000 of cash wages. Unemployment tax requirements vary at the state level, so check your local requirements. 

Side note: depending on your state, you may also have to provide workers’ compensation and disability insurance. In New York, for example, it’s required for household employees who work at least 40 hours per week. 

Possibly File State Income Tax Returns

If you’re on the hook for state income tax, you’ll need to file a return and forward those state income taxes you’ve been withholding from your nanny’s pay. Check with your state to get clear on the rules and deadlines where you live.

File Forms W-2 and W-3 With the Social Security Administration 

For the 2022 tax year, these forms are due to the Social Security Administration by January 31, 2023. This is also the deadline to provide your nanny with their W-2.

File Federal Income Tax Returns

When you file your personal tax return every year, be sure to also file Schedule H. This is how you’ll report your household employment taxes. 

Penalties for Paying Household Employees Under the Table 

Again, you’re obligated to pay Medicare and Social Security taxes. Failing to do so could result in hefty IRS penalties—plus back taxes. The average cost of penalties and interest adds up to $25,000, according to SitterCity. You could be slapped with other fines for failing to file and pay unemployment tax. And if you skipped out on required workers’ compensation insurance, your state may impose penalties of its own.  

Following the Rules Could Qualify You for Tax Breaks

Paying your nanny the right way provides them with benefits they deserve, which is reason enough to do it, but there are other perks to being a good employer. It might allow you to claim the child and dependent care tax credit. It’s a tax break that allows you to capture a credit worth up to 50% of your childcare expenses, depending on your income. This includes wages paid to your nanny. For the 2021 tax year, it maxes out at $8,000 of expenses for one child; $6,000 for two or more children. 

It's worth noting that the child and dependent care tax credit was expanded per the American Rescue Plan. For 2022, parents can claim 35% of eligible childcare expenses that cap at $3,000 for one child and $6,000 for two or more children. That could still work out to a nice tax break. This is all to say that there are plenty of good reasons to pay your nanny on the books. If you’re feeling overwhelmed by it all, we’re here to help you iron out the details. 

AJ Grossan