Is it Ok to Pay Your Nanny Cash?

If you’re a nanny searching for work, or already have one in your home, the thought of paying them cash may be troubling if you are already struggling to cover childcare and personal bills. This decision can be especially challenging if there’s not enough money in the budget for both.

Paying your nanny legally and correctly has many advantages; one of the most significant being that it will save you time, money and stress in the future.

Astrid Hamilton of Nanny Payroll recommends taking the time to pay your nanny accurately in order to avoid an IRS audit. She suggests doing the following:

1. Acquire federal and state employer tax IDs (FEINs and SS Numbers) for your household employees in order to comply with employment taxes.

This is an essential step, as it identifies you as the household employer and allows for withholding federal and state employment taxes from employees’ wages. Failure to do so could result in back taxes, penalties and interest for both you and your nanny.

2. Make sure your nanny receives a payslip that details their earnings, hours worked and other details.

The payslip is an essential document for your nanny, serving to build her employment history and access unemployment benefits if she ever loses her job or leaves you. It may also serve as a reference point in case of investigation or dispute with her employer.

3. If desired, withhold income and social security taxes from your nanny’s paycheck each payday.

If you pay your nanny hourly, or any other schedule other than monthly, it is essential that you withhold and remit appropriate income taxes from their payments. Failure to do so could result in an IRS audit with back taxes, fines and penalties for both of you – back taxes included!

4. Make sure your nanny files their W-2 form annually as required by law.

The IRS defines a household employee as any individual who works in your home and meets certain criteria that indicate they are not self-employed. This includes nannies, house cleaners, babysitters, cooks, drivers and other types of household workers.

5. Make sure your nanny submits their W-2 forms annually and on time.

While this may seem like a daunting task, it’s essential if you want to avoid an IRS audit. Being caught skipping payroll or not filing taxes could cost thousands in fines, penalties and interest.

6. Safeguard your nanny’s rights and future opportunities.

Failure to withhold and remit taxes on household employee income can negatively impact their eligibility for healthcare subsidies, unemployment benefits should they lose their job, loan verification through verifiable employment history, as well as Social Security/Medicare when they retire. 6. Provide for adequate support of current expenses

Although these benefits are worth the extra effort, it’s essential to be aware that misclassifying your nanny is not only illegal but could prove a career-ending mistake for her and you as well, according to Oswalt. For licensed professionals, C-level executives, and those in financial industries particularly, being charged with tax fraud could prove an enormous setback in their career progression.