Can You Get Audited for Nanny Taxes?

You've been paying your nanny under the table. Or maybe you filed Schedule H but aren't sure you did it right. Either way, the thought crosses your mind: can the IRS actually audit me for this?

Short answer: yes. And it doesn't always start with a random audit.

How Common Are Nanny Tax Audits?

The IRS audited about 505,000 individual returns in fiscal year 2024—roughly 0.5% of all returns filed. Most were correspondence audits (by mail), not the knock-on-your-door variety.

There's no published separate audit rate specifically for Schedule H filers. But here's the important context: only about 5.3% of eligible households actually file Schedule H and pay nanny taxes, according to IRS research. That means the compliance gap is enormous—and the IRS knows it.

So while random audits targeting nanny taxes are uncommon, event-triggered audits happen regularly. And when they happen, the IRS already has a pretty good idea that something's wrong.

What Triggers a Nanny Tax Audit

The IRS doesn't typically stumble onto household employment issues by accident. Almost every case starts with a specific trigger.

1. Your Nanny Files for Unemployment

This is the #1 trigger and it's straightforward. Your nanny files a claim, the state checks for employer unemployment tax payments, finds nothing, and shares that information with the IRS.

We wrote a full guide on what happens when your nanny files for unemployment. The short version: one unemployment claim can unravel years of unpaid taxes.

2. Your Nanny Reports Their Income

Your nanny is legally required to report their income—with or without a W-2 from you. If they file their own taxes using Form 8919 (uncollected Social Security and Medicare tax) or request a worker classification determination via Form SS-8, the IRS data-matching system looks for your corresponding Schedule H and W-2.

When it doesn't find one, you get a notice.

3. IRS Information Matching

The IRS receives copies of every W-2, 1099, and Schedule H filed. Their Automated Underreporter (AUR) program cross-references these documents against individual tax returns. If the data doesn't match—say, your nanny's W-2 shows $40,000 in wages but you never filed Schedule H—the discrepancy gets flagged.

4. Workers' Compensation Claim

Your nanny gets injured on the job and files a workers' comp claim. If you don't have coverage (many states require it for household employers), the investigation leads to your employment records—and the absence of payroll tax payments.

5. State-Federal Data Sharing

States and the IRS routinely share employment data. When you register with your state for unemployment insurance, that information flows to the IRS. When you don't register but should have, the absence itself can trigger questions.

6. Divorce and Legal Proceedings

Financial discovery during divorce often uncovers household employment expenses. Attorneys, forensic accountants, and judges have seen this pattern before. If your divorce records show regular cash payments to a caregiver but no corresponding tax filings, it can lead to IRS referrals.

7. Disgruntled Former Employee

A nanny who feels wronged can report you directly to the IRS using Form 211 (the whistleblower form). The IRS pays informants 15–30% of collected taxes on amounts over $2 million, and accepts tips on smaller amounts too.

8. Government Background Checks

Applying for a government job, security clearance, or political appointment? Your financial records get scrutinized. Unreported household employment is one of the most common issues that surfaces. The "Nannygate" scandals of the 1990s are the most famous examples.

How Far Back Can the IRS Audit?

This is where it gets serious.

That last row is the critical one. If you've been paying under the table and never filed Schedule H, the statute of limitations never begins. The IRS can assess taxes for any year, no matter how long ago.

This is one of the strongest arguments for getting compliant now—even filing late starts the clock.

What Happens During an Audit

If the IRS does come calling, here's what to expect:

Correspondence Audit (Most Common)

About 78% of IRS audits are conducted by mail. You'll receive a notice asking you to verify specific items on your return—typically employment tax amounts, W-2 discrepancies, or missing Schedule H.

You respond with documentation. The IRS reviews it. They either close the case or request more information.

Office or Field Audit (Less Common)

For larger discrepancies, the IRS may request an in-person meeting at an IRS office or send an agent to your home. This typically happens when:

• Multiple years of taxes are at issue
• The amounts are significant
• There's a pattern of non-compliance

What the IRS Will Ask For

Expect requests for:

• Payroll records (dates, amounts, hours)
• Canceled checks or bank statements showing payments
• The nanny's W-4 and I-9
• Quarterly tax payment records
• W-2 copies
• Schedule H filing
• Your nanny's work agreement or contract
• State tax filings

If you've been using a payroll service, you'll have all of this. If you've been paying cash with no records... that's a problem.

What to Do If You're Audited

1. Read the Notice Carefully

An audit notice is not an accusation of fraud. It's a request for information. Most audits are resolved without penalties or with manageable ones.

2. Respond Within the Deadline

The notice will specify a response deadline—usually 30 days. Missing the deadline can result in the IRS assessing taxes based on their own calculations (which won't be in your favor).

3. Gather Your Documentation

Pull together everything you have:

• Payroll records or service reports
• Bank statements showing payments
• Canceled checks
• Work agreements
• Tax filings and payment confirmations

4. Consider Professional Help

A CPA or enrolled agent experienced with household employment taxes can:

• Review your records for accuracy
• Represent you before the IRS
• Negotiate penalty abatement
• Identify credits or deductions you may have missed

For complex cases (multiple years, large amounts, potential fraud), consult a tax attorney instead.

5. Cooperate—But Don't Volunteer

Provide what's requested. Answer questions honestly. But don't volunteer information or documents beyond what's asked for.

6. Know Your Rights

You have the right to:

• Professional representation (CPA, enrolled agent, or attorney)
• Appeal any IRS determination
• Request penalty abatement for reasonable cause or first-time penalty relief
• Payment plans for amounts owed

State Audits: A Separate Risk

The IRS isn't the only agency that can audit you. State labor departments and tax agencies conduct their own audits independently.

State audits can be triggered by:

• Unemployment claims (most common)
• Workers' comp claims
• Wage complaints from employees
• Random selection from new employer registrations

State penalties vary significantly. Some states are more aggressive than others—New York, California, and New Jersey are known for active enforcement of household employer requirements.

You can face both federal and state audits simultaneously for the same employment relationship. The penalties stack.

How to Audit-Proof Your Household Payroll

The best audit is the one that never happens—or the one you breeze through because your records are perfect.

A payroll service handles most of this automatically. NannyKeeper calculates all your taxes, generates every document, reminds you of every deadline, and keeps records you can access anytime.

The Math: Compliance vs. Risk

Compliance costs you roughly the price of a streaming subscription per month after tax credits. Non-compliance costs you nothing—until it costs you everything.

Use our nanny tax calculator to see the exact numbers for your situation.

FAQ

How likely is it that I'll get audited for nanny taxes?

Random audits of household employers are uncommon—the IRS audits about 0.5% of individual returns overall. However, event-triggered audits (unemployment claims, nanny filing their own taxes, workers' comp claims) are the real risk. If your nanny ever files for unemployment or reports their income to the IRS, the discrepancy will be flagged.

Can the IRS audit me if I never filed Schedule H?

Yes—and there's no time limit. If you never filed Schedule H, the statute of limitations never starts running. The IRS can assess unpaid household employment taxes for any year, no matter how far back. Filing—even late—starts the 3-year clock.

What triggers an IRS audit for household employers?

The most common triggers are: (1) your nanny files for unemployment, (2) your nanny reports income using Form 8919, (3) IRS data-matching finds discrepancies between W-2s and tax returns, (4) workers' compensation claims, (5) divorce/legal proceedings, and (6) reports from former employees.

How far back can the IRS go for nanny taxes?

Three years from the filing date for standard returns. Six years if there's a substantial understatement (more than 25% of gross income). Unlimited if you never filed or committed fraud. If you've never filed Schedule H, the IRS can go back to the first year you hired a household employee.

Should I get a CPA if I'm audited?

For a simple correspondence audit with good records, you may be able to handle it yourself. For anything involving multiple years of unpaid taxes, potential penalties, or complex situations, yes—a CPA or enrolled agent experienced with household employment can save you significant money through penalty abatement and proper documentation.

Can I go to jail for not paying nanny taxes?

Criminal prosecution of household employers is rare but legally possible. Willful tax evasion (26 USC §7201) carries up to 5 years in prison and a $250,000 fine. The IRS typically pursues civil penalties first. Criminal charges are more likely in cases involving large amounts over many years or deliberate concealment.

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