Although household employment tax laws certainly add an additional expense to your childcare budget, you really can’t afford not to comply with the law. Although some nannies may even ask to be paid “under the table”, a family that agrees to such an arrangement is taking significant legal and financial risks.
In the event of an audit, you, as the household employer, will be ultimately responsible for all FICA and other employment taxes that are owed to the government on your nanny’s wages, even if you did not withhold the nanny’s share because you had been paying her “under the table”. IRS audit rates continue to increase, particularly for higher income taxpayers, so it is your family - not the nanny - that is assuming most of the financial risk of an "under the table" employment relationship. Moreover, if you are employed by the government or in a professional capacity, your avoidance of your household employment tax obligations could put your job or career in jeopardy.
Remember, although at the start you may think you have a good relationship with your nanny and that your employee will never “turn you in”, realize that this employment relationship will eventually end, and perhaps not on good terms. Even if you and your nanny do part ways on good terms down the road, many times the first place a recently unemployed nanny will turn is to the unemployment office, to file for benefits, at which point your “under the table” arrangement is likely to be exposed.
Moreover, paying your nanny illegally does not treat her like the professional which she is, and impedes her future financial security. Legal employment is particularly important for younger workers because, for example, they will need to have a verifiable wage history to apply for a car loan or credit card, and to start earning credit toward future social security benefits.
Although it may seem tempting at first to pay your nanny "under the table", it is never a good idea for either the family or the employee.