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The Surprising Truth About Paying Your Nanny Under the Table

Updated: Nov 11, 2020

If you're reading this, you are probably trying to figure out if it's wise to pay your nanny taxes. Nannies are SO expensive already - might it somehow be possible to save a bit of money and skirt the rules in just this one area of your life? Maybe you're thinking that you can report just a portion of your nanny's pay and reduce your tax bill, while still reaping some of the benefits of your employer's dependent care flexible spending account. There are tons of posts out there on why you shouldn't pay your nanny under the table, but they sound so JUDGY.

These are real, significant dollar amounts to families that are having trouble coming to terms with just how much of their take-home pay they're already having to shell out to cover their nanny's hourly rate.

I had all of these thoughts when I was returning from maternity leave with my first son and trying to not just search for a nanny we loved but also come to terms with our new budget and how little money would be left over after paying our childcare expenses each month. I'm a CPA and am (big surprise!) quite detail-oriented, so I devoured as much information as I could about whether or not we REALLY needed to report our nanny's wages and pay the taxes. I kept thinking I might find some exclusion that applied to our family, buried deep in the tax code. Spoiler alert - there wasn't.

The thing is, what surprised me most was discovering the most likely thing that would happen if we made the decision to pay our nanny under the table:


According to the IRS, approximately 138 million tax returns were filed for the 2018 tax year, which, I don't know, sounds like a lot. The odds of getting audited fall somewhere around .5% for middle-class families and don't get much higher until you make over $500k. The point here is that the IRS has limited resources and likely won't give your tax return a second (or, frankly, first) look.

There has to be a catch though, right? Unfortunately, there is.

What ultimately compelled me to suck it up and commit to paying nanny taxes came down to a few things.

1) Evading taxes is wrong. While it pains me to give up my hard-earned money to the government as much as the next person, the law is the law. I also felt a strong commitment to model integrity to my new son and tax avoidance just didn't jive with that value.

2) I hold a professional license as a CPA. To remain in good standing in this profession, I have to take ethics courses every so often and I also have to certify (under penalties of perjury) that I have not broken the law or evaded taxes, among other crimes. If I got caught, I would most likely be stripped of my CPA designation and would have a difficult time ever working in my field again. That definitely didn't feel worth it to save a few bucks.

3) Using my dependent care flexible spending account available to me through my employer goes a long way toward offsetting the tax expense. Basically how it works is that you can put up to $5,000 per family of pre-tax money into the account and then reimburse yourself for things like nanny wages, preschool, daycare, etc. Based on your tax rate, you can save around 30% by reimbursing yourself with pre-tax money - that's around $1,500 that can help cover nanny taxes. You can't use this account to pay for un-reported nanny wages, since the IRS asks for social security numbers of childcare providers that you paid using these funds.

4) There are real, tangible benefits to paying your nanny above board. As I write this blog post, I am stuck at home due to a global pandemic and, though I'm fortunate to still have a healthy, reliable childcare provider, many nannies have been pushed out of work for health or financial reasons. If your nanny has been paid on the books, he or she can apply for unemployment benefits, reduced hour benefits, or paid sick leave, depending on your location. You also have options to apply for funding to help you cover your nanny's payroll if you have reduced work hours or need to temporarily let your nanny go. NONE of this assistance is available to you or your nanny without proper tax records and payments.

At the end of the day, I knew that I wanted to provide a positive work environment for my nanny, set a good example for my family, and never have to worry about looking over my shoulder for the IRS auditor. Holding onto some extra money just didn't feel worth the trade-off.

If you've made the decision to pay your nanny on the books, but are looking for an affordable way to manage all the logistics, we have some low cost services to help you navigate your complex requirements. If you have any other questions about your specific situation, drop us a line. We'd love to hear from you.


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