5 Nanny Payroll Mistakes That Cost Families Thousands

Most families don't set out to break tax rules. They just don't know what they don't know—until a letter arrives from the IRS.

Here are the five most expensive mistakes we see, and how to avoid them.

Mistake #1: Paying Under the Table

This is the big one. Lots of families pay their nanny in cash without any tax reporting, thinking "everyone does it" or "it's not a real job."

What it costs:

• Back taxes for all unpaid years
• Interest (currently ~7% annually)
• Penalties up to 25% of unpaid taxes
• Your nanny loses Social Security credits
• No unemployment protection if you let them go

How to fix it: If you've been paying under the table, you can get compliant going forward. The IRS is generally more forgiving when you proactively come into compliance. Start withholding now, file your quarterly taxes, and move forward properly.

The good news: Most families never get audited. But if you do—or if your nanny files for unemployment—things get expensive fast.

Mistake #2: Treating Your Nanny as a Contractor

"My nanny is a 1099 contractor" is the second most common mistake. Families think this saves them payroll taxes and paperwork.

Why it doesn't work: The IRS uses a "control test" to determine employment status. If you:

• Set your nanny's schedule
• Tell them what to do and how to do it
• Provide the workplace (your home)
• Pay a regular wage

...then they're an employee, not a contractor. There's no gray area here for household workers.

What it costs:

• Back employment taxes you should have paid
• Penalties for misclassification
• Your nanny's unpaid Social Security and Medicare
• Potential lawsuits if your nanny files for unemployment

How to fix it: Stop issuing 1099s and start proper W-2 employment. If you've already issued 1099s, consult a tax professional about amending prior returns.

Read our full guide on employee vs. contractor →

Mistake #3: Missing the $3,000 Threshold

The federal tax threshold for 2026 is $3,000 per employee per year. Cross it, and you're a household employer with tax obligations.

The problem: $3,000 is just $58/week. Many families cross this threshold without realizing it—especially with a regular babysitter who's "not quite a nanny."

What it costs:

• Back taxes for the full year once you realize
• Potential penalties and interest
• Scrambling to get paperwork in order mid-year

How to prevent it: Track what you pay each household worker from January 1st. When you approach $2,000, decide whether to:

• Spread hours across multiple workers
• Accept that you're crossing the threshold and set up proper payroll

Check your state's specific threshold →

Mistake #4: Forgetting State Taxes

Federal taxes are complicated enough. But many families forget about state requirements entirely.

State obligations can include:

• State unemployment insurance (SUTA)
• State disability insurance (CA, NJ, NY, RI, HI)
• Paid family leave contributions (CA, NJ, NY, WA, MA, CT, OR, CO, MD, DE)
• State income tax withholding (most states)

What it costs:

• State penalties and interest
• Surprise tax bills at year-end
• Potential liability if your nanny files for benefits they should have

How to prevent it: Look up your state's requirements → before you hire. Each state has different thresholds, rates, and registration requirements.

Mistake #5: Skipping Quarterly Payments

Some families withhold taxes from each paycheck but forget to actually send the money to the IRS and state agencies.

How quarterly payments work: Every quarter (April 15, June 15, September 15, January 15), you owe:

• Social Security and Medicare withheld from your nanny
• Your employer share of Social Security and Medicare
• Federal and state unemployment taxes

What happens if you skip:

• Underpayment penalties
• Interest charges
• A massive tax bill at year-end when you can't pay estimated taxes anymore

How to prevent it: Set up quarterly reminders or use a payroll service that tracks deadlines. NannyKeeper sends email reminders before each quarterly deadline.

The Real Cost of Mistakes

Let's say you've been paying a nanny $40,000/year under the table for three years. If the IRS catches up:

And that's just for federal taxes. State penalties can add thousands more.

How to Get Back on Track

If you've made any of these mistakes, here's the path forward:

1. Stop the mistake now — Start proper payroll immediately
2. Don't panic — Many families fix this without major consequences
3. Consider a tax professional — If you need to amend prior returns
4. Set up systems — Use a payroll service to prevent future errors

Prevention Is Cheaper Than Correction

NannyKeeper costs $10-18/month. That's $120-216/year to:

• Calculate every tax automatically
• Send quarterly deadline reminders
• Generate W-2s and Schedule H
• Handle all 50 states

Compare that to a $13,000+ back-tax bill, and the choice is clear.