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Everybody knows you have to pay your taxes, and the majority of law abiding citizens do what they can to uphold the law. But when it comes to a typical nanny salary, many families don't realize their requirements to withhold certain deductions like unemployment insurance, disability insurance, social security, or Medicare. Tax requirements come into play when the nanny pay scale exceeds $1,100 annually (social security and Medicare), or, for federal unemployment tax, when the nanny pay scale exceeds more than $1,000 in a calendar quarter.
At first, it might seem easier to simply offer nanny pay under the table. Unfortunately, most cash-only deals end up causing more problems than they solve. For one thing, you might go years without getting caught, but if at some point one of your future nannies applied for unemployment insurance, or something similar, the fact that there's no paper trail is going to raise a few eyebrows. Watch out if that happens and hang onto your wallet! The fines and penalties (plus interest) could add up to thousands more dollars than you would have paid had you filed your nanny tax forms right from the start.
The bottom line: Don't be overwhelmed by the prospect of filing nanny taxes. There are all kinds of resources including specialized nanny accountants, nanny software for figuring out related tax returns, nanny tax calculators, and even specific agencies to help with your nanny tax deductions. Don't be concerned about the extra costs of correctly filing nanny tax forms, be concerned about the penalties and fines of not filing your taxes!