I had a baby two months ago and I am fortunate enough to have a really generous maternity leave from my job. But in about two months, I’ll have to start working again. My partner works full time from an office, and even though I’ll be working from home, I don’t think I’ll be able to pay attention to work and tend to my newborn.
We’ve started the process of interviewing nannies, and we found one we really like. But we are unsure of the best way to pay her. Can we pay her in cash—under the table? Or do we need to fill out tax forms like she’s an employee? Do we need to form a company to do this? We aren’t going through an agency which would normally handle payment. We would like to do this in the easiest way possible which would also maximize the money our nanny gets to take home. But we also don’t want to do anything illegal. So, cash or no cash? Help!
Congratulations on the birth of your child! I’m glad to hear you’ve been given paid leave from your job—it’s sadly a benefit that too many new parents don’t get from their jobs and one that the United States doesn’t guarantee (unlike pretty much every other country).
To answer your question quickly, it’s best to avoid paying your nanny in cash. But paying a nanny—or any household employee—isn’t as difficult as you might think!
Paying your nanny “under the table” might seem like an attractive option, but it might get you in trouble. The IRS always likes to make sure it gets its cut from the income of any worker, and if their salary is more than $2,300 in 2021 (the threshold can change from year to year), you need to withhold Social Security and Medicare taxes (FICA taxes), as well as unemployment taxes if their wage exceeds more than $1,000 each quarter. The government will also expect you to pay your portion as your nanny’s employer.
I checked in with tax advisor and consultant Lea Uradu, who said that in order to pay your nanny, first you must obtain an EIN, or employer identification number. She said that getting one doesn’t take long, but you do want to make sure to follow the steps on the IRS website.
Once you’ve done that, you’ll need to fill out an I-9 form, which guarantees that your nanny can legally work in the United States. Uradu said that this form must be completed no later than your nanny’s first day and should be kept in your records.
There are a few exceptions to some of these tax withholding requirements, like if the nanny is your spouse, or your child under the age of 21. Based on your letter, it doesn’t seem like these exceptions apply, though you should double check with the IRS to make sure.
“You should also check your state guidelines on withholding for unemployment,” Uradu wrote in an email to The Balance, just in case you might be required to pay your state's unemployment tax on behalf of the nanny.
Uradu warned against paying your nanny in cash and said you shouldn’t issue a personal check, either. Third-party platforms like Venmo or Cash App could cause big problems, Uradu said. She suggested using your EIN to open a business checking account to pay wages. You can even use an online payroll system to help make the payment process easier.
The IRS requires records of payments to your nanny, which Uradu said you should keep for 4 years.
The IRS does not require you to withhold federal income taxes, but if your nanny asks you to do so and you agree, there are additional tax forms that’ll need to be filled out, like the employee withholding certificate, the W-4. You’ll have to check with your state for further details on state withholding information.
Don’t forget that because your nanny will be paying taxes, you as their employer will need to provide them with additional forms: the W-2 wage and tax statement, as well as the W-3, which summarizes the pay and withholdings.
Uradu also said that if your nanny’s wages are subject to the FICA and unemployment taxes, you will have to fill out some tax forms when you and your partner pay taxes. You may also be required to pay estimated taxes throughout the year using IRS Form 1040 ES.
I know this process seems daunting, but the good news is that once you pay these taxes, you might be eligible for tax breaks for child and dependent care expenses.
If you have questions about money, Kristin is here to help. Submit an anonymous question and she may answer it in a future column.