What’s my risk?
Consider this very common scenario: You have a nanny that you and your kids love, and she works for you until the kids start all-day kindergarten. Now out of a job, the nanny files for unemployment, and lists you as her former employer.That sets off alarm bells at the state unemployment office, who has no record of you filing employer tax returns or paying state unemployment taxes. So they refuse to pay her any unemployment, and may start audit proceedings against you.

The file may also get kicked up to the IRS, bringing serious trouble. You could be on the hook for significant fines, penalties, back taxes, interest totaling (on average) $25,000 … and even tax evasion or fraud charges.

If you paid at least $2,000 to a nanny in 2016, you probably have to pay employment taxes … or risk a stiff IRS fine.

By law, nannies are always employees. And as the employer, you’re legally required to provide an official paycheck – and that involves the “nanny tax.”

The “nanny tax” covers both taxes you withhold from your household employee (the exact same way your employer takes taxes out of your paycheck) plus employer taxes. Those employer taxes include matching the amount of Social Security and Medicare (together called FICA) taxes you withheld from the nanny’s check and also federal and state unemployment taxes.

When you have an employee on payroll, there are annual forms to fill out, quarterly forms to file with the IRS, and regular tax payments to be made. According to IRS estimates, this will take you about 60 hours a year.

If you want to try to figure it all out yourself, start with the IRS booklet.

If you feel more comfortable hiring a payroll service – which many families do – be prepared to pay anywhere from $40-$60 per month on top of the nanny’s pay and employer payroll tax obligations. There are several reliable services available, but this is one of the most reputable (and affordable).