The Benefits of Paying Your Nanny Over-the-Table, According to a Lawyer

Published: May 17, 2025

Alicia Garibaldi

When you're juggling two careers, raising kids, and trying to keep your household running smoothly, managing the nanny payroll can feel like just another chore on an endless to-do list. You may find yourself wondering:

• Do we really need to put our nanny on payroll?
• What happens if our nanny gets hurt on the job—are we liable?
• Will we qualify for any tax breaks if we do this the right way?
• How do we make sure we're following the law without adding more stress to our lives?

The truth is, staying compliant isn't as complicated as it seems. A simple nanny contract and solid payroll process for your new hire can make all the difference. I spoke with a legal expert about why paying your nanny legally—through a payroll system—is worth it and why you might want to make the switch, too, if you haven’t already.

[TOC]Can I get audited by the IRS for large bank withdrawals for a nanny?

Yes. Banks are required to report cash withdrawals over $10,000, and even transactions in the $6,000–$7,000 range can raise red flags to the IRS. From a legal standpoint, paying your nanny in cash without formal payroll could result in criminal tax evasion charges. Not only could you face penalties, but your nanny could also be at risk if they fail to report their income. Simply put, it’s not worth the risk or headache if you get audited.

[TOC]How much more does it cost to pay a nanny legally through payroll?

While paying legally does come with additional costs, the numbers may not be as high as you’d imagine. On average, paying a nanny legally costs about 10% more per hour. For example, if you're paying them $800, you’ll pay about $80 in state and federal taxes. As a result, your total payroll would be $880. However, you may also qualify for tax benefits like:

• A $6,000 caregiver tax credit to help offset costs.
• The ability to use an FSA (Flexible Spending Account) for tax-free childcare expenses.

Be sure to check your state’s specific tax requirements for additional savings opportunities—and again, the peace of mind to remain safe from risk on both sides is well worth the added fees.

[TOC]Why use a nanny payroll system instead of tracking payments yourself?

Managing payroll manually requires:

• Obtaining an Employer Identification Number (EIN)
• Withholding and paying Social Security and Medicare taxes
• Filing and distributing W-2 forms to your nanny

Handling this yourself can be overwhelming and time-consuming. Don’t worry, though! We’ve broken it all down in a helpful article if you want to manually track everything. A lawyer advocates for professional nanny payroll services to simplify the process, ensuring tax compliance while eliminating administrative headaches.

[TOC]What are the benefits of paying a nanny legally?

While paying in cash might seem convenient, it creates long-term disadvantages for both you and your nanny:

• For you: Frequent cash withdrawals can be a hassle, increase audit risks, and complicate financial tracking.
• For your nanny: Without official employment records, they can't build credit, qualify for loans, or apply for a mortgage.

Paying over the table safeguards everyone from audits, penalties, and overall peace of mind.

[TOC]Why are large cash withdrawals risky? 

• Banking flags + audit risk: Withdrawals in the thousands can trigger red flags at your bank or with the IRS, especially if they appear frequent and without a clear paper trail. Banks are required to report cash withdrawals exceeding $10,000, but even smaller, repeated withdrawals can appear suspicious and increase your audit risk.
• Lost financial clarity: Withdrawing large sums of cash can disrupt your personal cash flow. It becomes difficult to track where the money went, making budgeting more challenging and complicating your ability to reconcile accounts.
• No tax deduction or household benefits: When you pay in cash, you lose access to potential tax breaks like the caregiver tax credit or the ability to use your FSA account. 
• Legal penalties + back taxes: If audited or investigated, you’re liable for unpaid employment taxes, penalties, and interest. The IRS and state agencies can impose steep fines for failing to pay required nanny taxes.

Why paying your nanny legally Is the smart choice

When hiring a nanny, paying them legally is the best decision for both your financial security and your future. Avoid the risks and complications of non-compliance by using household payroll service provider. It’s a hassle-free way to stay compliant while providing fair, legal compensation for your household employee.

• Financial protection + automation: Services like Poppins Payroll handle your payroll, tax withholdings, and filings — helping you meet your household employment obligations and minimizing your workload.
• Credit + benefits for your nanny: A legally employed nanny can show verifiable income, pay into Social Security and Medicare, qualify for unemployment or disability, and build a financial record to apply for loans or housing.
• Peace of mind: You reduce the fear of audits, legal troubles, or disputes down the road. It’s a transparent, professional arrangement that protects both parties.

Looking for a simple solution? Explore Poppins Payroll's services to streamline the process and ensure you’re making the right choice for your nanny and your family.

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The content of this article is general and informational in nature and may not be appropriate for your specific circumstances. The information is not intended to provide legal or tax advice, and should not be relied upon without consulting with an attorney and/or tax professional.