Why You Should Stop Paying Your Nanny Under the Table
Paying a nanny under the table exposes you to back taxes, interest, and penalties if discovered, and leaves your nanny without unemployment insurance, disability benefits, or a verifiable work history.
Quick Answer
Paying a nanny under the table exposes you to back taxes, interest, and penalties if discovered, and leaves your nanny without unemployment insurance, disability benefits, or a verifiable work history. The most common trigger for discovery is an unemployment claim after the nanny leaves.
How Off-the-Books Arrangements Get Discovered
The most common trigger is an unemployment claim. When a nanny who was paid cash files for state unemployment benefits, California EDD contacts you to verify their wages. If you have not been remitting employer taxes, you owe them retroactively -- plus interest and often penalties. This is not a remote possibility. EDD unemployment filings by domestic workers are common and the agency has become more active in enforcing compliance.
What You Owe Retroactively
If EDD determines you were an employer of record (which they almost certainly will if someone worked regular hours for you), you owe the employer portion of FICA taxes, federal unemployment tax, California state unemployment insurance, and California SDI for every year the arrangement was off the books. Interest accrues from the date payment was due. Penalties can add an additional 10 to 25%.
The Risk to Your Nanny
For every year your nanny was paid cash, they have no Social Security credit, no official employment history, no disability coverage if they were injured, and no unemployment protection when they leave. Many domestic workers accept cash pay because they were not offered a choice. They bear significant risk for an arrangement that mainly benefits the employer.
How to Transition to Legal Pay
If you are currently paying off the books, transitioning to legal pay is straightforward going forward. Set up a household employer account with the IRS (EIN) and California EDD. Enroll in a payroll service. Give your nanny the choice between paying taxes out of their current rate or adjusting the gross rate so their net pay remains similar. Most nannies prefer the latter once they understand the benefits they gain.
The Cost Is Smaller Than the Risk
Employer payroll overhead in California runs approximately 10 to 12% of gross wages. On a $40/hr nanny working 45 hours per week, that is roughly $9,000 to $11,000 per year in employer taxes. The liability exposure from an undiscovered off-the-books arrangement can exceed $50,000 in back taxes, interest, and penalties on a multi-year engagement.
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