Paying cash is simple. No paperwork, no accounts, no quarterly deadlines. Your nanny prefers it. You prefer it. Everyone's happy.
Until someone isn't.
Why Most Families Pay Under the Table
Most families who pay cash aren't trying to break the law. They either:
- Don't know about the $3,000 threshold (the point where taxes kick in)
- Think "everyone does it"
- Assume their nanny prefers cash (she might—but that doesn't make it legal)
- Figure they'll never get caught
And for a while, nothing happens. No IRS letter, no audit, no consequences.
Then something changes.
How Families Actually Get Caught
It's usually not a random audit. These are the most common ways the IRS finds out.
1. Your Nanny Files for Unemployment
This is the #1 trigger. Your nanny leaves (or you let her go), and she files for unemployment benefits. The state labor agency checks their records and finds... nothing. No SUTA payments, no FUTA, no record of employment.
Now the state knows. And states share data with the IRS.
A single unemployment claim can unravel years of unpaid taxes. We wrote a full guide on what happens when your nanny files for unemployment.
2. Your Nanny Files Their Own Taxes
Your nanny is required to report their income regardless of whether you give them a W-2. They can file Form SS-8 (worker classification) or Form 8919 (uncollected Social Security and Medicare tax) with the IRS.
The IRS data-matching system then looks for your corresponding Schedule H and W-2. When it doesn't find one, you get a letter.
3. Workers' Compensation Claim
Your nanny gets hurt on the job—a back injury lifting a toddler, a slip on your stairs. If they file a workers' comp claim and you have no insurance (many states require it for household employers), the investigation leads straight to your employment records.
4. The Relationship Ends Badly
This is probably the most common real-world trigger. A nanny who feels wronged—fired unfairly, owed wages, or just angry—can report you to the IRS, the state labor department, or both.
The IRS even has a whistleblower program that pays informants a percentage of collected taxes.
5. Background Checks and Political Appointments
This one's famous. In 1993, two of President Clinton's attorney general nominees—Zoë Baird and Kimba Wood—were disqualified over household employment tax issues. Baird had hired undocumented workers and failed to pay employment taxes. The scandal was so significant it coined the term "Nannygate."
In 2004, NYC Police Commissioner Bernard Kerik withdrew his nomination for Homeland Security Secretary over similar issues. He was later convicted on multiple felony counts including tax fraud and sentenced to four years in federal prison.
If you ever need a security clearance, government appointment, or even certain professional licenses—unpaid nanny taxes will surface.
The Real Cost of Getting Caught
Say you paid a nanny $40,000/year under the table for 3 years. Here's what the math looks like.
Back Taxes You'd Owe
| Tax | Rate | Per Year | 3 Years |
|---|---|---|---|
| Employer Social Security | 6.2% | $2,480 | $7,440 |
| Employer Medicare | 1.45% | $580 | $1,740 |
| FUTA (federal unemployment) | 0.6% | $42 | $126 |
| SUTA (state unemployment, ~2.7%) | ~2.7% on first $7K–$56K (varies by state) | $189–$1,080 | $567–$3,240 |
| Subtotal | $3,291 | $9,873 |
Plus: you'd owe the employee's share too (another 7.65% = $3,060/year), since you can't retroactively withhold from paychecks you already paid.
Total back taxes for 3 years: ~$19,000
Penalties on Top
| Penalty | How It Works | Max Amount |
|---|---|---|
| Failure to file Schedule H | 5% per month of unpaid tax, up to 25% | ~$4,750 |
| Failure to pay | 0.5% per month, up to 25% | ~$4,750 |
| Failure to furnish W-2 | $340 per form (2026) | $340/year |
| Trust Fund Recovery Penalty | 100% of employee's withheld taxes | $9,180 |
| Interest | ~7% annually, compounding | ~$2,500+ |
Add It All Up
| Item | Amount |
|---|---|
| Back taxes (employer + employee share) | ~$19,000 |
| Penalties (conservative) | ~$5,000–$10,000 |
| Interest (3 years) | ~$2,500 |
| Total | $25,000–$30,000+ |
And that's just federal. State penalties add more on top.
Criminal Penalties (Rare but Real)
For willful tax evasion (26 USC §7201):
| Charge | Penalty |
|---|---|
| Tax evasion (felony) | Up to 5 years prison + $250,000 fine |
| Failure to collect employment taxes (felony) | Up to 5 years prison + $10,000 fine |
| Willful failure to file (misdemeanor) | Up to 1 year prison + $25,000 fine |
Criminal prosecution is rare for household employers. But "rare" isn't "never"—and the bar is lower than you'd think.
What Your Nanny Loses Too
Paying under the table doesn't just put you at risk. Your nanny loses:
Social Security credits. Every year of unreported wages is a year that doesn't count toward their retirement benefits. Over a career, that's thousands of dollars in lost monthly retirement income.
Unemployment insurance. If you let them go, they can't collect benefits because you never paid into the system. That's months of income they can't access.
Workers' compensation. If they're injured on the job, they have no coverage and may have to sue you personally.
Tax credits and benefits. Without a W-2, your nanny can't easily file their own taxes, claim the Earned Income Tax Credit, or prove income for loans and housing.
Legal vs. Under-the-Table
Paying Legally
- Your nanny builds Social Security credits
- They can claim unemployment if needed
- You can claim tax credits (up to $6,000 back)
- No risk of IRS penalties or back taxes
- Professional relationship with clear records
Paying Cash
- Your nanny gets no Social Security credit
- No unemployment benefits if they're let go
- You can't claim childcare tax credits
- Risk of IRS audit, penalties, and back taxes
- Can damage your relationship if discovered
What It Actually Costs to Pay Legally
Most families don't realize this: paying legally is cheaper than getting caught.
| Under the Table | Paying Legally | |
|---|---|---|
| Annual employer taxes (~8%) | $0 now | ~$3,200 on $40K salary |
| Payroll service | $0 | $120/year (NannyKeeper Starter) |
| Risk of IRS penalties | $25,000+ | $0 |
| Child care tax credit | Can't claim | Up to $2,100 back |
| Dependent care FSA | Can't use | Up to $5,000 pre-tax savings |
| Net annual cost | $0 (until caught) | ~$1,100–$3,200 |
When you factor in the child care tax credit and dependent care FSA, the net cost of paying legally can be less than $1,000/year for many families. That's the cost of one nice dinner out per month.
Use our nanny tax calculator to see the exact numbers for your situation.
How to Get Right with the IRS
If you've been paying under the table, you can fix this. Most families who come forward proactively get much better outcomes than those who get caught.
Step 1: Start Paying Legally Now
The most important step is to start doing it right going forward:
- Get an EIN from the IRS (free, 5 minutes online)
- Have your nanny fill out a W-4
- Start withholding taxes from their next paycheck
- Sign up for NannyKeeper to handle the calculations
Step 2: Decide About Back Taxes
You have two paths:
Path A: Start fresh, move forward. Many tax professionals recommend simply starting proper payroll now without amending prior years. The IRS is more lenient when you proactively come into compliance. Risk: if audited later, you'd still owe back taxes.
Path B: Full catch-up filing. Work with a CPA or tax attorney to file late Schedule H returns, pay back taxes, and request first-time penalty abatement. More expensive upfront but eliminates future risk. Read our guide to catching up on back nanny taxes.
Step 3: File Correctly Going Forward
Once you're set up, compliance takes about 15 minutes per quarter:
- NannyKeeper calculates all your federal and state taxes automatically
- We generate your W-2, Schedule H, and pay stubs
- We send email reminders before every deadline
- You submit the forms (we tell you exactly where and how)
Ready to simplify nanny taxes?
NannyKeeper handles the calculations, deadlines, and paperwork so you can focus on your family.
FAQ
How does the IRS find out about unreported nanny wages?
The most common trigger is when a nanny files for unemployment benefits. The state discovers no employment taxes were paid and shares that information with the IRS. Other triggers include the nanny filing their own tax return (using Form 8919), workers' comp claims, divorce proceedings, and disgruntled former employees reporting their employer.
Can I go to jail for not paying nanny taxes?
Technically yes. Willful tax evasion under 26 USC §7201 carries up to 5 years in prison and a $250,000 fine. In practice, criminal prosecution of household employers is rare—the IRS typically pursues civil penalties (back taxes + 25%+ in fines) rather than criminal charges. But high-profile cases like Bernard Kerik show it does happen.
What's the statute of limitations on nanny taxes?
If you filed Schedule H: 3 years (6 years for substantial understatement of over 25%). If you never filed: there is no statute of limitations. The IRS can assess unpaid household employment taxes for any year, no matter how far back. This is why proactively filing—even late—starts the clock.
My nanny prefers cash. Is that okay?
You can pay in cash, but you still must withhold taxes and report the wages. "Cash" refers to the payment method, not whether taxes are paid. Many families pay by check or direct deposit specifically to create a paper trail, but the legal obligation is the same regardless of payment method. Check your state's requirements for specific rules.
How much does it cost to get compliant?
Getting compliant costs roughly $3,000–$4,000/year in employer taxes on a $40,000 salary, plus $120/year for NannyKeeper. Factor in child care tax credits (up to $2,100) and dependent care FSA savings (up to $5,000 pre-tax), and the net cost is often under $1,000/year. Compare that to $25,000+ in penalties if caught.