Paying under the table feels easier. No paperwork, no quarterly filings, no W-2s. But what actually happens if you skip nanny taxes?
Here's the honest truth about the risks.
Not sure what you owe? Check our nanny taxes guide for a breakdown of rates and obligations.
The Typical Scenario
TL;DR: Skip nanny taxes and you risk back taxes plus up to 25% in penalties plus ~7% annual interest. For 3 years of unpaid taxes on a $40,000 salary, you could owe $12,000+. It's recoverable, but expensive.
Most families don't set out to evade taxes. They just don't know about the annual threshold ($3,000 for 2026), or they think "everyone pays cash." A year goes by, then two, then five.
Then something triggers an audit:
- Your nanny files for unemployment
- Your nanny applies for Social Security benefits
- A background check reveals unreported income
- You're selected for random IRS audit
- You go through a divorce (financial discovery)
When the IRS finds unreported household employment, they don't just ask for the taxes—they add penalties and interest going back years.
What You'd Actually Owe
Let's say you paid a nanny $40,000/year under the table for 3 years:
Back Taxes
| Tax | Per Year | 3 Years |
|---|---|---|
| Employer Social Security (6.2%) | $2,480 | $7,440 |
| Employer Medicare (1.45%) | $580 | $1,740 |
| FUTA (~0.6%) | $42 | $126 |
| SUTA (~1%) | $400 | $1,200 |
| Total back taxes | $10,506 |
Penalties
| Penalty | Rate | Amount |
|---|---|---|
| Failure to file | 5%/month, up to 25% | ~$2,627 |
| Failure to pay | 0.5%/month, up to 25% | ~$2,627 |
| Total penalties | Up to $5,254 |
Interest
Interest compounds on unpaid taxes at roughly 8% per year. On $10,506 over 3 years:
Approximate interest: $1,500-2,500
Grand Total
| Item | Amount |
|---|---|
| Back taxes | $10,506 |
| Penalties | $5,254 |
| Interest | ~$2,000 |
| Total owed | ~$17,760 |
And that's just federal. State penalties add more.
The "Nanny Tax" Audit Triggers
The IRS doesn't randomly audit most families. But certain events raise red flags:
1. Unemployment claims When your nanny files for unemployment, the state checks whether you've been paying unemployment taxes. If you haven't, they notify the IRS.
2. Social Security applications Your nanny eventually retires and applies for Social Security. If their earnings history doesn't match their actual income, the SSA investigates.
3. Background checks Government jobs, security clearances, and some private employers run thorough background checks. Unreported income stands out.
4. Divorce proceedings Financial discovery during divorce often uncovers household employment expenses that weren't properly reported.
5. Whistleblowers Former employees who feel wronged sometimes report their employers to the IRS. There's even a reward program.
Criminal Penalties
In extreme cases, the IRS can pursue criminal charges:
- Tax evasion: Willfully attempting to evade taxes
- Penalty: Up to 5 years in prison and $250,000 fine
Criminal prosecution is rare for household employers. But it's not unheard of—especially for high-income families paying large salaries under the table for years.
The "Nannygate" Precedent
In 1993, President Clinton's attorney general nominee Zoë Baird withdrew after revelations that she'd employed undocumented immigrants and failed to pay employment taxes. Similar scandals have affected other nominees since.
If you ever need a security clearance or public appointment, unpaid nanny taxes will surface.
Your Nanny's Consequences
It's not just you who suffers:
Lost Social Security credits Your nanny doesn't get credit toward retirement benefits for wages you didn't report.
No unemployment insurance If you let them go, they can't collect unemployment because you never paid into the system.
Tax liability Your nanny still owes income tax on their earnings—but without W-2s, their filing is complicated.
How to Get Compliant
If you've been paying under the table, here's the path forward:
Option 1: Start Now, Move Forward
Many tax professionals recommend simply starting proper payroll now and not amending prior years. The IRS is more forgiving when you proactively come into compliance.
- Get an EIN
- Start withholding and paying taxes this pay period
- File quarterly going forward
- Issue W-2s at year end
This approach has risk—if audited, you'd still owe back taxes. But many families never get audited.
Option 2: Full Disclosure
Work with a tax professional to:
- Calculate what you should have paid
- File amended returns or late filings
- Pay back taxes with penalties and interest
- Request penalty abatement (sometimes granted for first-time issues)
This approach is expensive upfront but eliminates future risk.
Option 3: Voluntary Disclosure Program
For serious situations (multiple years, large amounts), the IRS has a voluntary disclosure program that reduces penalties in exchange for coming forward.
Consult a tax attorney if this applies to you.
The Cost of Compliance vs. Non-Compliance
| Path | Annual Cost | Risk |
|---|---|---|
| Compliant payroll | ~$3,500 in taxes + $216 for NannyKeeper | Zero |
| Under the table | $0 | $17,000+ if caught |
Compliance costs a few thousand per year. Getting caught costs tens of thousands—plus the stress and potential legal consequences.
Getting Started
If you're ready to get compliant:
- Get an EIN (5 minutes, free)
- Sign up for NannyKeeper (10 minutes)
- Start withholding from your nanny's next paycheck
- File your first quarterly taxes
It's not too late to start doing this right.
Ready to simplify nanny taxes?
NannyKeeper handles the calculations, deadlines, and paperwork so you can focus on your family.
Related reading:
What happens if you pay your nanny under the table →