You pull $700 from the ATM every Friday and hand it to your nanny in twenties. They asked specifically for cash. No paper trail, no taxes withheld, no W-2 — just a transaction between two people.
Cash is legal. The taxes aren't optional, though. And the lack of a paper trail cuts both ways: families who think cash makes them invisible to the IRS are usually surprised by how the wages get reported anyway.
The Short Answer
Yes, you can pay your nanny in cash. The IRS doesn't require any specific payment method — checks, direct deposit, Venmo, twenties from the ATM, all of these are fine for delivering wages.
What the IRS does care about: whether you withhold the right taxes, file a W-2, and pay your employer share. None of that changes when you pay cash.
Why Cash Feels Different (And Why That's Wrong)
Cash payments to a household employee are wages — the same as a check, a Venmo transfer, or direct deposit. Three myths persist anyway:
Myth 1: "If it's cash, there's no record, so there's no tax." There's no record of the transfer. There's still a record of you withdrawing the cash from your bank, a record of your nanny depositing some of it (or spending it), and — most consequentially — your nanny's own memory and any contemporaneous notes about what they were paid. Lack of a wire transfer doesn't change tax law.
Myth 2: "We agreed to keep it off the books, so it's between us." Mutual agreement between employer and employee doesn't override federal tax law. Both parties remain legally obligated to report wages. When the relationship ends (and most do, eventually), either party can disclose without the other's consent.
Myth 3: "Below $3,000 it doesn't matter, so cash is fine." The $3,000 threshold is per single household employee per calendar year. Above that, every dollar — including the first $2,999 — becomes subject to FICA. If you started cash-only thinking you'd stay under $3,000 and crossed it, you owe taxes on the full amount retroactively, not just the dollars above.
What the IRS Actually Says
IRS Publication 926 is unambiguous about what counts as "wages":
"Cash wages include wages you pay by check, money order, etc. Cash wages don't include the value of food, lodging, clothing, transit passes, and other noncash items you give your household employee."
The "etc." covers cash, electronic transfers, gift cards used as wage substitutes, and any other monetary payment. The IRS is explicit that how you pay doesn't change what you owe.
What You Still Owe (No Matter How You Pay)
| Obligation | Required When You Pay Cash? |
|---|---|
| Withhold 7.65% FICA from each paycheck | Yes |
| Pay 7.65% employer FICA on each paycheck | Yes |
| Pay 0.6% FUTA on first $7,000/yr | Yes |
| Pay state unemployment (SUTA) | Yes |
| Get an EIN | Yes |
| Issue a W-2 by January 31 | Yes |
| File Schedule H with your 1040 | Yes |
| Provide pay stubs (state-dependent) | Yes |
The payment method appears nowhere on this list. Cash, check, Venmo, direct deposit — same obligations.
The Cash Audit Trail Problem
Families who pay cash often assume the lack of bank records makes them invisible. They're not. Here are the actual paper trails the IRS uses:
Your bank withdrawal pattern. Regular cash withdrawals matching a nanny-pay schedule ($700 every Friday) look like wage payments. Auditors specifically look for this pattern.
Your nanny's deposit pattern. If your nanny deposits even part of the cash, their bank records show recurring deposits at suspicious round numbers.
Your nanny's tax return. Your nanny may file their own taxes and report the income on a Schedule C or Form 1040 Other Income, even if you gave them no W-2. The IRS now has a wage figure attached to your nanny's SSN with no corresponding employer filing.
Your nanny's unemployment claim. This is by far the most common trigger. When the job ends, your nanny files for unemployment. The state agency cross-references with the IRS. No employer record = automatic investigation.
Mortgage applications, medical assistance, divorce filings. Any time your nanny needs to prove income — for a loan, an apartment, disability assistance, custody filings — they need documentation. That documentation comes from a W-2 you should have issued.
How Families Get Caught
The penalties stack fast: failure-to-file fines, back FICA on both shares, interest from the date of original underpayment, and no statute of limitations on unreported payroll taxes.
| Penalty | Amount |
|---|---|
| Failure to file W-2 (intentional) | $680 per form, no cap |
| Failure to deposit employment taxes | 2–15% of unpaid amount |
| Back taxes (full FICA, both shares) | 15.3% of all wages paid |
| FUTA + state unemployment back taxes | ~1% of wages |
| Interest on unpaid amounts | Accrues daily |
| Statute of limitations for unreported payroll | None |
For a nanny earning $50,000/year, two years of cash-without-payroll typically results in $15,000–$25,000 in combined back taxes, penalties, and interest. The IRS is not gentle about this.
The Hidden Cost to Your Nanny
The cost to you is financial. The cost to your nanny is structural:
- No Social Security credits. Cash without W-2 means no contributions to your nanny's lifetime Social Security record. They'll discover this at retirement.
- No unemployment eligibility. If you let them go, they can't collect benefits without a documented work history.
- No proof of income. Renting an apartment, applying for a mortgage, qualifying for credit, applying for disability — all require pay stubs or W-2s.
- No paid family leave eligibility. States with PFL programs (New York, California, Washington, etc.) require documented employment to qualify.
- No tax credits. Your nanny may qualify for the Earned Income Tax Credit or other refundable credits — but only if their wages are documented.
A nanny who agrees to cash-without-payroll today usually doesn't realize what they're giving up until years later.
How to Do It Right (And Still Pay Cash if You Want)
You can pay cash and still handle taxes properly. The two pieces are independent:
- Run payroll through a service like NannyKeeper. It calculates gross-to-net, withholds the right FICA share, generates a pay stub, and tracks toward year-end W-2 and Schedule H.
- Deliver the net pay in cash. The payroll service tells you exactly what to hand your nanny. You withdraw that amount, deliver it, and give them the pay stub.
That's it. Your nanny still gets paid in cash if they prefer. You're still compliant.
What this looks like in practice
Say you've agreed to pay your nanny $700/week (net of their FICA share). Here's what NannyKeeper would calculate for a standard arrangement:
| Calculation | Amount |
|---|---|
| Gross pay (what shows on W-2) | $758 |
| Employee FICA withholding (7.65%) | $58 |
| Federal income tax withheld | $0 (optional, your choice) |
| Net pay (what you hand over) | $700 |
| Your employer FICA (separate, not deducted) | $58 |
| Your FUTA (0.6% on first $7,000) | $4.55 |
You withdraw $700 in cash, hand it over with the pay stub. Separately, you owe the IRS $58 (employer FICA) + $4.55 (FUTA) for that paycheck. Both get paid quarterly.
Filing takes about 15 minutes per quarter. The cash hand-off changes nothing about the tax mechanics.
If You've Been Paying Cash Without Taxes
Every additional quarter you wait adds penalties and interest. Voluntary correction almost always costs less than getting caught through an unemployment claim or audit.
The short version:
- Start proper payroll now (going forward)
- Calculate what you owe for past cash payments
- File late W-2s and pay the back taxes with interest
- The IRS generally treats voluntary disclosure more favorably than getting caught through an unemployment claim or audit
Our catching up on back nanny taxes guide walks through the process step by step. The most important thing: every additional quarter you wait adds more penalties and interest.
FAQ
Is it illegal to pay my nanny in cash?
No. Paying in cash is legal. What's illegal is failing to withhold and pay employment taxes once you cross $3,000/year for any single household employee — and that's true whether you pay by cash, check, Venmo, or direct deposit. See IRS Publication 926 for the rules.
How will the IRS know I'm paying my nanny in cash?
Several common ways: your nanny files for unemployment after the job ends and the state cross-references with the IRS; your nanny reports income on their own return; an audit examines your bank withdrawals; or a mortgage application from your nanny requires income proof that surfaces the missing W-2. The lack of a wire transfer doesn't make the wages invisible.
What if my nanny prefers cash and we both agree to keep it off the books?
Mutual agreement doesn't override federal tax law. Both parties remain liable. When the employment ends — and it almost always does eventually — either party can disclose without the other's consent. The party who didn't withhold taxes (you) is the one the IRS pursues first.
Do I have to give a pay stub if I pay cash?
In most states, yes. California, New York, Massachusetts, Colorado, and many others require itemized pay stubs regardless of payment method. Cash without a pay stub can trigger state-level penalties on top of federal tax issues. Check your state's requirements →
Can I just call my nanny an independent contractor and skip all this?
No. The IRS uses a control test, not a payment-method test. If you control when, where, and how the work is done — which is true of virtually every nanny arrangement — your nanny is your employee, not a contractor. See employee vs. contractor for the full breakdown. Misclassifying to avoid payroll taxes is a separate violation that carries its own penalties.
What if I pay less than $3,000 a year in cash?
Below $3,000 to a single household employee in 2026, you don't owe FICA on those wages. But if you cross $3,000 at any point in the year, FICA applies to all wages paid that year — including the first dollar. If you're close to the threshold, calculate where you are now → and start withholding before you cross it.
Does this apply to babysitters too?
Yes. The IRS treats babysitters and nannies as the same category — both are household employees, both have the same $3,000 threshold per person per calendar year. Cash payments to a regular babysitter who crosses $3,000 trigger the same FICA, W-2, and Schedule H obligations. See babysitter taxes for the babysitter-specific breakdown.
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