How to File Taxes as a Nanny Paid Under the Table

For nannies paid in cash or “under the table,” navigating tax obligations can seem overwhelming. All income, regardless of how it is received, is taxable. Clear steps exist to help individuals fulfill their tax responsibilities and achieve compliance. Addressing unreported income helps prevent potential issues with tax authorities.

Understanding Your Tax Status

A nanny is typically considered a household employee, not an independent contractor, for tax purposes. The IRS classifies a worker as an employee if the person paying for the services controls what work is done and how it is done. Since families typically dictate the nanny’s schedule, duties, and how tasks are performed, an employer-employee relationship is usually established. Misclassifying a nanny as an independent contractor can lead to significant penalties for the employer, and it also means the nanny may miss out on benefits like unemployment insurance.

As a household employee, your income is subject to several types of taxes. Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare, are generally shared between the employee and employer. For 2024, the Social Security tax rate is 6.2% on wages up to $168,600, and the Medicare tax rate is 1.45% on all wages, resulting in a combined 7.65% for both the employee and employer. Federal income tax is another obligation; while employers are not required to withhold it from a household employee’s wages, they may do so if the employee requests it via Form W-4.

Beyond federal taxes, nannies may also be subject to state and local income taxes, which vary by location. Employers are generally responsible for paying federal unemployment tax (FUTA) and often state unemployment taxes if they pay a household employee above a certain threshold, such as $1,000 or more in any calendar quarter. These unemployment taxes are solely the employer’s responsibility and are not deducted from the nanny’s wages.

Calculating and Reporting Unreported Income

To address previously unreported income, accurately determine the total amount received. If formal pay stubs or W-2 forms were not provided, reconstruct income records using alternative documentation. This might include bank statements showing deposits, personal calendars detailing hours worked, or written agreements outlining hourly rates or salaries.

Once the total unreported income is calculated, you must include it on your tax return. If you did not file a return for the year(s) in question, file an original Form 1040 for each year. If you previously filed a return but did not include your nanny income, file an amended return using Form 1040-X. Form 1040-X requires you to list the amounts as originally reported, the changes being made, and the corrected amounts, along with an explanation for the amendment.

If your employer did not withhold or pay their share of FICA taxes, you may need to use Form 8919, Uncollected Social Security and Medicare Tax on Wages. This form calculates your share of the FICA taxes not withheld, which you then report on your Form 1040. If your employer should have paid FICA taxes but did not, you are still responsible for your employee portion, and the IRS may pursue the employer for their share.

Gross income from your nanny work should be included on the appropriate lines of your Form 1040 or Form 1040-X. This ensures your total income is accurately reflected, allowing for proper calculation of your federal income tax liability.

Addressing Penalties and Payment Options

Be aware of potential penalties when addressing past non-compliance. The IRS assesses a failure-to-file penalty if a return is not submitted by the due date, which is 5% of the unpaid tax per month, up to 25%. A failure-to-pay penalty may also apply if taxes are not paid by the due date, typically 0.5% of the unpaid taxes per month, also capped at 25%. If both penalties apply in the same month, the failure-to-file penalty is reduced by the failure-to-pay penalty amount.

An accuracy-related penalty of 20% of the underpayment may be assessed for substantial understatement of income tax or negligence. You can request penalty abatement under certain circumstances, such as demonstrating reasonable cause. Reasonable cause might include serious illness, natural disaster, or reliance on incorrect professional advice, and is evaluated on a case-by-case basis. Submitting a written request, often using Form 843, and providing clear documentation can strengthen a request for abatement.

After calculating taxes and any applicable penalties, various payment options are available. The IRS Direct Pay system allows secure payments directly from your bank account. If you cannot pay the full amount immediately, an Installment Agreement allows monthly payments for up to 72 months, though interest and penalties continue to accrue. Another option is an Offer in Compromise (OIC), which allows certain taxpayers to resolve their tax liability with the IRS for a lower amount than what is owed, under specific financial hardship conditions.

Ensuring Future Tax Compliance

To ensure ongoing tax compliance, communicate with your employer about proper tax reporting. Ideally, your employer should provide you with a Form W-2 by January 31st each year, which reports your wages and taxes withheld. This form is crucial for accurately filing your personal income tax return. If your employer is unwilling or unable to provide a W-2, you still have an obligation to report your income.

For income not subject to withholding, you may need to make estimated tax payments throughout the year. This is done using Form 1040-ES, and payments are typically made quarterly. Calculating these payments involves estimating your total income, deductions, and credits for the year to determine your tax liability. Making timely estimated payments helps avoid underpayment penalties.

Understanding your employer’s responsibilities can facilitate your own compliance. Employers of household employees are generally required to obtain an Employer Identification Number (EIN), file Schedule H with their personal tax return, and issue Form W-2 to their nanny. They are also responsible for their share of FICA taxes and federal unemployment taxes. Knowing these obligations can help you advocate for proper reporting and ensure you receive the necessary documentation for your own tax filings.