How to Catch Up on Back Nanny Taxes

You've been paying your nanny under the table. Maybe you didn't know about the rules. Maybe you thought "everyone does it." Maybe it just felt easier at the time.

Now you're realizing you should fix this—but you're worried about what it'll cost and how complicated it'll be.

First, take a breath. You're not alone. This is one of the most common situations we hear about. And the good news is: it's fixable.

Why This Happens to Good People

Let's be honest about how families end up here. You hired someone great to care for your kids. You were focused on finding the right person, agreeing on hours and pay, and making sure your children were safe and happy.

No one handed you a "Congratulations, You're Now a Household Employer" packet. No one mentioned Schedule H. Your nanny probably didn't ask about taxes—they may not have known either.

By the time you learned about nanny taxes, you'd already been paying cash for months or years. At that point, fixing it felt overwhelming.

You're not a bad person. You just didn't know. Now you do, and you want to make it right. That's what matters.

What You Actually Owe

For each year you paid your nanny above the threshold ($3,000 for 2026, $2,800 for 2025, varying for earlier years), you owe employer taxes. Let's break down exactly what that means.

Your Employer Tax Obligations

What About the Employee's Share?

Here's the tricky part. Your nanny was supposed to have 7.65% (Social Security + Medicare) withheld from each paycheck. That didn't happen.

Can you go back and deduct it now? Practically speaking, no. You can't reduce someone's pay retroactively for taxes that should have been withheld years ago.

Who pays the employee's share? In most catch-up situations, you as the employer end up absorbing this cost. It's not fair, but it's reality.

Real Example: What You Might Owe

Scenario: You paid a nanny $35,000/year for 3 years under the table.

That's just the taxes. Now let's add penalties and interest.

Understanding Penalties and Interest

The IRS charges penalties for late filing and late payment, plus interest on unpaid amounts. Here's what to expect:

Federal Penalties

According to IRS guidelines:

Failure-to-file penalty: 5% of unpaid taxes per month, up to 25% maximum

• If you're 3+ years late: You've hit the 25% cap

Failure-to-pay penalty: 0.5% of unpaid taxes per month, up to 25% maximum

• Runs concurrently with failure-to-file
• Combined penalties capped at 25% per month

Interest: Currently around 7% annually (varies quarterly based on federal rates)

• Compounds daily
• Runs from the original due date until paid

Putting It Together

For that $2,895 you owed in Year 1, filed 3 years late:

That's about 64% more than the original tax bill. Painful, but not catastrophic.

The Three-Year Example (Complete)

Bottom line: About $12,500 to clean up 3 years of back taxes on $105,000 in wages. That's roughly 12% of what you paid—significant, but manageable for most families who were paying $35,000/year for childcare.

How Far Back Should You Go?

The IRS has different timeframes for pursuing unpaid taxes:

• 3 years: Normal audit window for honest mistakes
• 6 years: For "substantial understatement" (more than 25% of income unreported)
• No limit: For fraud or willful evasion

Your Options

Option A: Fix Everything (Most Conservative)

Go back and file for every year you should have. This provides maximum peace of mind and eliminates future risk entirely.

Best for:

• Very risk-averse families
• High income or high audit risk
• Those who want complete closure
• Anyone with political aspirations or security clearance needs

Cost: Highest, but you sleep well at night

Option B: Fix the Last 3 Years (Most Common)

Address years within the normal audit window. This covers most practical risk while limiting costs.

Best for:

• Most families
• Those seeking a balance of compliance and practicality
• Families who want to demonstrate good faith

Cost: Moderate—typically what we recommend

Option C: Start Fresh Going Forward

Begin doing things correctly now without addressing past years. The past remains a theoretical risk, but cost is lowest.

Best for:

• Families with modest nanny wages
• Situations with very low audit risk
• Very tight budgets
• Short employment periods (e.g., only employed nanny for 6 months)

Cost: Just future compliance, but some ongoing risk

Our Recommendation

For most families, Option B (last 3 years) strikes the right balance. You're demonstrating good faith to the IRS, covering the primary audit window, and keeping costs manageable.

If your total back tax liability would exceed $10,000-$15,000, consult a tax professional before deciding.

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Step-by-Step: How to Actually Fix This

Step 1: Calculate What You Owe

For each year you're addressing:

1. Total wages paid (cash, checks, Venmo—everything)
2. Multiply by employer tax rates (7.65% FICA + ~2% SUTA)
3. Add FUTA ($42 per year, max)
4. Estimate penalties and interest (add 40-60% for years 2+ late)

Our nanny tax calculator can help you estimate the employer tax portion for current-year wages. For past years, use the rates above.

Step 2: Get Your Documentation Together

You'll need:

• Your nanny's name and Social Security number
• Records of payments (bank statements, Venmo history, etc.)
• Your EIN (or you'll get one now)

Don't have records? Do your best to reconstruct from memory and bank statements. Reasonable estimates are acceptable when exact records aren't available.

Step 3: File Late Federal Returns

For each year you're addressing:

1. Download the Schedule H for that year from IRS.gov prior-year forms
2. Complete the form with wages and calculated taxes
3. If you already filed Form 1040 for that year: File Form 1040-X (amended return) with Schedule H attached
4. If you haven't filed Form 1040 for that year: File the complete return with Schedule H
5. Mail to the IRS with payment

Where to mail: The address on the form instructions varies by state. Double-check before sending.

Step 4: Address State Unemployment (SUTA)

Each state handles this differently—find your state's requirements. But the general process:

1. Contact your state's unemployment insurance agency (usually the Department of Labor or Employment Development Department)
2. Ask about filing late reports and their voluntary disclosure process
3. Complete required forms for each quarter/year
4. Pay the back taxes plus any penalties

Many states are more lenient than the IRS about penalties for voluntary disclosure.

Step 5: Handle W-2s

Technically, you should have issued W-2s to your nanny each year. Options for fixing this:

If your nanny is still with you:

1. Prepare late W-2s for each year
2. File with SSA using Form W-2c (corrected W-2) and Form W-3c
3. Give copies to your nanny
4. Your nanny may need to file amended personal returns

If your nanny has moved on:

• You can still file late W-2s with the SSA
• Getting them to your former nanny is harder but worthwhile
• Their Social Security record gets corrected

Reality check: The IRS is primarily concerned with collecting taxes owed. Many families in catch-up situations focus on Schedule H and don't formally address back W-2s. Discuss specifics with a tax professional.

Step 6: Set Up Proper Payroll Going Forward

This is the most important step. Once you've addressed the past, make sure you never end up here again:

1. Get an EIN at IRS.gov (free, 5 minutes)
2. Register with your state for unemployment insurance
3. Start withholding from your nanny's paychecks (7.65% for FICA)
4. Set up a payroll service so the math and deadlines are handled for you
5. Make quarterly payments or increase your W-4 withholding to cover the taxes

NannyKeeper calculates every paycheck automatically — federal, state, FICA, FUTA — and reminds you before each quarterly deadline. You'll never have to wonder what you owe or when it's due. Plans start at $10/mo, or track payments free while you get set up.

When to Get Professional Help

Consider hiring a tax professional (CPA or Enrolled Agent) if:

• Your back tax liability exceeds $10,000
• Multiple years (4+) are involved
• You have other complex tax situations
• You're not comfortable doing this yourself
• You've received an IRS notice or audit letter
• You want help negotiating with the IRS
• Your nanny was paid very high wages (over $100,000/year)

A professional can potentially:

• Reduce penalties through "reasonable cause" arguments
• Ensure you don't overpay
• Handle communication with the IRS
• Advise on optimal strategy for your situation

Cost: Expect to pay $200-$500/hour for a tax professional specializing in this area, or flat fees of $1,000-$3,000 for a complete catch-up engagement.

What Happens If You Don't Fix It?

Let's be real about the risks of doing nothing:

Scenario 1: Your Nanny Files for Unemployment

If you let your nanny go and they file for unemployment benefits:

• The state unemployment office searches for wage records
• They find nothing
• They investigate
• You get a letter

Scenario 2: Your Nanny Needs Documentation

Your nanny tries to:

• Get a mortgage
• Rent an apartment
• Apply for government benefits
• Claim Social Security

They can't document their income. Some will just accept it. Others will ask questions—or worse.

Scenario 3: Random IRS Audit

You're audited for some other reason (random selection, discrepancy on your return). The auditor notices:

• Large cash withdrawals
• No childcare credit claimed despite having children
• No Schedule H despite household help

They start digging.

Scenario 4: Your Nanny Reports You

It happens, especially after disputes. A disgruntled former nanny knows:

• How much you paid them
• That it was under the table
• That the IRS has a whistleblower program

The Likelihood

To be honest: most families who paid under the table never get caught. The IRS doesn't have unlimited resources, and household employment isn't their highest priority.

But "probably fine" isn't the same as "definitely fine." The risk is always there, and it grows if:

• Your nanny files for unemployment
• You go through a divorce
• You're audited for any reason
• Your nanny needs income verification
• You have a falling out with your nanny

FAQ

Will fixing this trigger an audit?

Filing late returns doesn't automatically trigger an audit. The IRS actually views voluntary compliance positively—you're more likely to be audited if you don't fix things and something else triggers a review.

Can I negotiate the penalties?

Sometimes. If you have "reasonable cause" for the late filing (like genuinely not knowing about the requirement), you can request penalty abatement using Form 843 or a written statement. Interest cannot be waived.

What if my nanny won't cooperate?

You can file your Schedule H and pay your taxes without your nanny's active participation. You need their SSN (you should have this from their W-4), but you don't need their signature on anything.

Should I tell my nanny what I'm doing?

That's your call. Some families handle the cleanup quietly. Others involve the nanny since it affects their Social Security record. There's no legal requirement to tell them, but transparency is generally better for the relationship.

What if we paid below the threshold some years?

Good news—you only owe taxes for years where you paid above the threshold. For 2026, that's $3,000; for 2025, it was $2,800. Check each year's threshold and do the math. You might owe less than you think.

Can I deduct the penalties and interest?

No. Tax penalties and interest are not deductible on your personal return.

What if I can't afford to pay it all at once?

The IRS offers payment plans. You can request an installment agreement to pay over time. Interest continues to accrue, but you avoid collection actions.

A Real Family's Story

The Nguyen Family:

Situation:

• Paid their nanny $32,000/year for 4 years
• Realized they should fix it when nanny asked about Social Security credits
• Total wages: $128,000

What they owed:

What they did:

1. Filed late Schedule H for all 4 years
2. Paid $13,600 over 12 months using IRS payment plan
3. Filed W-2c forms with SSA for their nanny
4. Set up NannyKeeper for 2026 going forward ($10/mo)
5. Increased W-4 withholding to cover quarterly taxes

Result: Clean slate. Their nanny now has proper Social Security credits. No ongoing audit risk. Total cost was painful but manageable — about $280/month for the IRS payment plan, plus $10/month for NannyKeeper to keep them on track going forward.

The Bottom Line

Catching up on back taxes isn't fun. But it's manageable, and the peace of mind is worth it.

Most families can:

1. Calculate what they owe
2. File late returns
3. Pay the taxes and penalties (with a payment plan if needed)
4. Start fresh with proper payroll

The cost of fixing it is almost always less than the cost of getting caught. And once you're compliant, ongoing payroll is straightforward — especially if you use a service that handles the calculations and deadlines for you.

Ready to start fresh? NannyKeeper calculates every paycheck, generates W-2s and Schedule H, and reminds you before each quarterly deadline — from $10/mo. Start tracking free →

Not sure what you owe going forward? Use our free nanny tax calculator to see exactly what you'll owe this year. And check your state's specific requirements — they vary a lot.

Read our complete guide to nanny taxes →

Learn about W-2s for household employees →

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