Paying the Nanny Under the Table

Here is the scenario:  You have found a wonderful nanny to care for your children in your home.  You are fully aware of the tax requirements for domestic employment, given that it is an occasional topic on the news when it is discovered that a politician has been circumventing the rules.  However, in your situation you agree to pay her cash.  She likes the idea because she doesn't have to report the income and you like the idea because you avoid paying employment taxes on her wages.  How will anybody (the IRS) ever find out?  Maybe everything works out and you live happily ever after.  But, let's just assume that you decide to let her go for any number of reasons.  A few weeks go by and you receive a letter from the Texas Workforce Commission.  Apparently she has filed for unemployment benefits.  How can she do this?  You never hired her as an "employee".  Careful there...she is perfectly within her rights to do this because she in fact met the statutory definition of a domestic employee.  You are now liable for back taxes, penalties, and interest.  You have to hire a lawyer to assist you in working through this mess.  Paying the nanny under the table seemed like such a good idea at the time!

The Wall Street Journal published an article on this topic yesterday.  It goes into more detail on why it is important to do the right thing when it comes to hiring a nanny and some additional resources for information.