Should I Pay My Nanny On the Books?

The short answer

Yes — if you're paying a household employee $3,000 or more in cash wages during 2026, the IRS requires you to withhold and pay employer taxes. Most states have a separate threshold (often $1,000 in a single quarter) that triggers state unemployment tax obligations earlier than the federal threshold.

This is true even if your employee:

• Works part-time
• Works for multiple families
• Was originally a babysitter who became a regular nanny
• Doesn't have a Social Security number

If you control how, when, and where they work, they're your household employee — not an independent contractor. The IRS is unambiguous on this point.

Why does paying on the books matter?

Two reasons that go in opposite directions:

It protects your employee

Paying legally gives your employee access to:

• Unemployment insurance — meaningful safety net if they're laid off
• Social Security and Medicare credits — toward retirement and disability
• Verifiable income — for renting an apartment, getting a mortgage, applying for credit, qualifying for ACA subsidies
• State disability and paid family leave — in California, New York, New Jersey, Hawaii, Rhode Island, and others
• Workers' compensation — for on-the-job injuries (mandatory in most states)

It protects you

Paying legally protects you from fines, penalties, wage theft lawsuits, and professional risk. A few specific exposures:

• Professional license risk: An attorney charged with failure to pay the nanny tax (which is tax fraud) can face state bar discipline, including disbarment. A medical doctor can lose their license.
• Wage theft claims: Domestic employees can file wage theft claims regardless of payment status, covering minimum wage, overtime, or unpaid Social Security/Medicare.
• Audit risk: A single unemployment claim from a former employee can trigger a state investigation that uncovers years of unpaid taxes.

Households learned this the hard way during 2020. Many had to let employees go because of COVID, and unemployment claims surfaced years of unpaid payroll taxes. Reactive catch-up under audit conditions is materially harder than voluntary catch-up.

What does it actually cost?

Most household employers budget about 10% on top of gross wages for employer-side taxes — federal Social Security and Medicare, federal unemployment, and state unemployment. In states with disability or paid family leave programs (California, New Jersey, etc.), the effective rate runs closer to 11–13%.

For a worked example, see the 2026 Nanny Tax Update. For a deeper walkthrough of how to combine the DCFSA and Care Tax Credit, see our complete guide to nanny tax breaks.

What can go wrong if you pay under the table?

Three things tend to surface unreported household employment:

• The employee files for unemployment. By far the most common trigger. The state contacts you, sees no record of your employer account, and the audit clock starts.
• The employee reports the income on their own taxes. Less common but it happens. The IRS gets a 1040 showing household employment that wasn't reported on anyone's Schedule H.
• Wage theft claims. Domestic employees are protected from wage theft regardless of payment status, and these claims often surface unpaid FICA and state taxes as part of the broader complaint.

If you've already been paying under the table and want to fix it, our complete catch-up guide walks through what's involved.

The full benefits of paying legally

Beyond the legal compliance argument, there are real practical upsides — many of which go unnoticed by households making this decision for the first time:

1. You stay compliant going forward, with documentation to prove it. If an employee ever files for unemployment, you have a clean record.
2. Any employee, paid legally or not, can file for unemployment. The IRS will enforce the underlying tax obligations regardless of how you paid.
3. You may qualify for the Dependent Care Tax Credit. For 2026, this credit covers up to 50% of qualifying childcare expenses (up to $3,000 for one child or $6,000 for two or more).
4. You can use a pre-tax Dependent Care FSA. The 2026 federal limit is $7,500 (up from $5,000 in 2025) — though many employer plans may still cap at $5,000, so check with HR. A family in the 24% bracket fully funding $7,500 saves roughly $1,800 in federal income tax alone, plus several hundred dollars in additional FICA savings.
5. Professional protection. Attorneys, doctors, finance professionals, and government employees face career risk from tax fraud charges.
6. Your employee gains verifiable income for loans, leases, mortgages, credit applications.
7. Your employee builds Social Security and Medicare credits toward retirement.
8. Your employee qualifies for unemployment insurance if they're laid off.
9. You can offer tax-free benefits like contributing to your employee's health insurance premium ($50–$200/month is typical) — which improves their compensation and reduces your taxable wage base.

How much work is it really?

The IRS estimates 60+ hours per year for household employers handling payroll themselves — and that estimate doesn't include state-specific tax work, which often adds another 10–15 hours per year per state.

If you use a household payroll service, the work drops to about 5 minutes per pay period (entering hours). Federal and state filings, year-end W-2s, and the Schedule H for your personal return are handled in the background.