How to Switch From Paying Your Nanny Cash

You've been paying your nanny cash. No W-2, no withholding, no quarterly filings. Maybe for months, maybe for years.

And now you want to do it right. That's a good decision—and it's simpler than you think.

Step 1: Get Your EIN

You need an Employer Identification Number from the IRS. It's free and takes about 5 minutes online.

Go to IRS.gov/EIN, answer a few questions, and you'll have your number immediately. Choose "household employer" as your entity type.

If you've never done this, our EIN guide walks through each screen.

Step 2: Talk to Your Nanny

This is the part most families dread. But it usually goes better than expected.

Frame it as a benefit to them. When you pay legally, your nanny gets:

• Social Security credits toward retirement (every year of unreported wages is a year that doesn't count)
• Unemployment insurance if they ever lose the job
• Verifiable income for apartment applications, car loans, and mortgages
• A W-2 that makes filing their own taxes straightforward
• Workers' comp protection if they're injured on the job

Most nannies understand these benefits once you explain them. The ones who resist usually worry about one thing: will my take-home pay drop?

That's where gross-up comes in.

Step 3: Decide How to Handle the Pay Adjustment

This is the most important decision in the whole process. You have two options.

Option A: Gross Up (Recommended)

Your nanny currently takes home, say, $800/week in cash. You increase their gross pay so that after taxes are withheld, they still take home $800.

To gross up for FICA alone, divide the desired take-home by 0.9235: $800 ÷ 0.9235 = $866/week. If your nanny also owes federal income tax (based on their W-4), you'd gross up further — use our calculator for exact numbers.

Yes, your costs go up roughly 17%. But you also unlock the child care tax credit (up to $3,000 back) and the dependent care FSA (up to $7,500 pre-tax), which offset most or all of that increase.

This is the path of least resistance. Your nanny's take-home doesn't change, so there's nothing to argue about.

Option B: Keep Gross the Same

You keep paying $800/week but now withhold taxes from it. After FICA (7.65%) and federal income tax withholding, your nanny's take-home drops to roughly $700–$739, depending on their W-4.

This is technically fair—the $800 was always supposed to have taxes withheld. But in practice, it feels like a pay cut. If your nanny is already at market rate, this can create real tension.

When Option B makes sense:

• You're already paying above market rate
• Your nanny understands and agrees
• Budget is tight and you can't absorb the increase

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

Step 4: Set Up Payroll

Once you've had the conversation and agreed on pay, the mechanics are straightforward:

Have your nanny fill out a W-4. This determines federal income tax withholding. Download it from the IRS or have them fill it out digitally.

Check your state requirements. Some states—like New York, California, and Illinois—require separate state registrations, disability insurance, or paid family leave withholding. Check your state's page for specifics.

Pick a start date. Any pay period works. You don't need to wait for the first of the month or the start of a quarter. Just pick a date and start withholding from that paycheck forward.

Set up a payroll system. You need something to calculate federal and state taxes, generate pay stubs, and track everything for year-end W-2s. NannyKeeper does this for $10/month—it handles all 50 states and tells you exactly what to file each quarter.

Step 5: Handle Your Quarterly Obligations

Once you're paying legally, you have a few things to do each quarter:

NannyKeeper sends email reminders before every deadline and generates all the forms. You just submit them.

See our tax deadline calendar for the full schedule.

What About Past Years?

This is a separate question, and you have options. The short version:

Most tax professionals recommend starting clean going forward rather than amending every prior year. The IRS is more lenient when you come into compliance voluntarily. If you want to address past years, work with a CPA.

We have a full guide on catching up on back nanny taxes with real penalty calculations.

The Conversation Script

Not sure what to say? Try something like this:

"Hey [name], I've been looking into our tax situation and I want to start doing things properly. I want to make sure you're building Social Security credits and have unemployment protection. I'm going to set up payroll so taxes are withheld, but I'm adjusting your gross pay so your take-home stays the same. Nothing changes for you except you'll get a W-2 at the end of the year."

Most nannies respond positively to this—especially the Social Security and unemployment parts. If your nanny has questions about how it affects their taxes, point them to our nanny W-2 benefits guide.

FAQ

Can I start paying legally mid-year?

Yes. You can switch at any point. You'll only owe taxes on wages paid from your start date forward (unless you choose to address prior years). Your W-2 at year-end will reflect the portion of the year you paid legally.

Will my nanny owe more in taxes?

Your nanny was always supposed to report their income and pay taxes on it, even without a W-2. In practice, some nannies didn't. With a W-2, their income is visible to the IRS—but they also gain access to credits like the Earned Income Tax Credit that can offset the taxes owed.

What if my nanny refuses to go on the books?

This is uncommon but it happens. Legally, you're the employer and the tax obligation is yours regardless of your nanny's preference. If they refuse, you have to decide whether to withhold taxes anyway (your legal obligation) or find a new nanny. You cannot legally agree to skip withholding.

Do I need to register with my state?

Most states require some form of registration for household employers. Requirements vary widely—some states just need you to register for unemployment insurance, while others require workers' comp, disability insurance, or paid family leave. Check your state's requirements.

How much will this cost me?

For a nanny earning $40,000/year with a gross-up, expect roughly $3,000–$4,000/year in additional employer taxes, plus $120/year for NannyKeeper. After the child care tax credit and dependent care FSA, the net increase is often under $1,000/year.