What Happens If You Don't Pay Nanny Taxes?

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, separate filing and payment penalties, plus IRS interest (7% annually in Q4 2026, reset quarterly). In the simplified example below, 3 years of unpaid taxes on a $40,000 salary reaches about $28,700 before state penalties. 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." Use our nanny tax calculator to see exactly what you'd owe. 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

Penalties

This illustration assumes both penalties run for the full periods shown, with no penalty relief. Actual accrual depends on each return's due date, payment date, and any relief the IRS grants.

Interest

IRS interest compounds daily; the annual rate is 7% in Q4 2026 and changes quarterly. Using a roughly 7% rate and aging the three annual federal liabilities separately (state SUTA is excluded):

Approximate federal interest: $2,600

Grand Total

And that's before any state penalties or state interest. The SUTA principal is included above, but those state additions depend on the jurisdiction.

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 (see our tax deadline calendar so you don't miss one)
• 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

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:

1. Get an EIN (5 minutes, free)
2. Sign up for NannyKeeper (10 minutes)
3. Start withholding from your nanny's next paycheck
4. File your first quarterly taxes

It's not too late to start doing this right.

Frequently Asked Questions

How far back can the IRS go for unpaid nanny taxes?

The IRS generally has three years from the date you file to assess additional tax. If you never filed Schedule H at all, there is no time limit, because the clock only starts once a return is filed. Fraud removes the limit too. That is why several years of unreported wages can be assessed in a single notice.

Can nanny tax penalties be reduced or waived?

Sometimes. The IRS grants first-time penalty abatement to filers with a clean recent history, and it waives penalties when you can show reasonable cause rather than willful neglect. Coming forward before an audit finds you gives you the best chance at relief. Interest on the unpaid tax is rarely waived.

What is the penalty for paying a nanny under the table?

There is no separate "under the table" fine. You owe the back taxes you skipped, plus a failure-to-file penalty of up to 25% and a failure-to-pay penalty of up to 25%, plus interest that compounds until the balance is paid. On a few years of unreported wages, penalties and interest commonly add well over half of the original tax bill.

Is it too late to start paying nanny taxes correctly?

No. Most families start proper payroll now and file correctly going forward, which is the move the IRS rewards most. You can also work with a tax professional to amend prior years if you want to remove the back-tax risk entirely. Starting today stops new penalties and interest from piling up.

Will my nanny be in trouble if I never paid their taxes?

Your nanny is not penalized for your failure to withhold, but they lose out: no Social Security or Medicare credits for those years, no unemployment eligibility, and a harder time proving income for a loan or apartment. Getting compliant restores those benefits going forward.

Related reading:

What happens if you pay your nanny under the table →

Can you get audited for nanny taxes? →

What happens when your nanny files for unemployment →