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I was a nanny and since both parents were lawyers they wanted to do the w-2 thing. However, they paid me crap, so subtract taxes and it sucked even more. It's your choice whether you want to pay them under the table, but know that if you want to go the w-2 route, you'll have to expect to pay them more.

We had a nanny and paid her employment taxes on top of her regular wages. Our accountant actually suggested that we steer clear of paying "under the table" because there are a variety of ways this can backfire and you may end up having to backpay taxes anyway. For example, if the IRS audits your taxes (and my MIL works for the IRS, so we get audited often) and you don't claim the child care credit on your taxes or if your nanny applies for unemployment or certain types of assistance, you can be required to pay back taxes for the entire length of employment.

Having said that, I know a lot of people who pay "under the table" and it seems to work out for them, so I guess it just depends on how big of a risk you're willing to take.

I've been a nanny for 3 different families. I've done both W-2 and cash under the table. I'm most comfortable with the W-2 if it's a full-time job because I'm too scared of getting in trouble with the IRS. But the cash-paying job I had was only part-time, and it worked great for us, too. I agree with @duckduckkristen: if you do W-2, you should pay them more to make up for the tax deductions.

@Dapple Grey: I don't know exactly, but our accountant mentioned there are multiple things that flag their auditors attention and may get you on the audit list. Things like claiming two incomes but no child care credit, consistent deposits of cash, huge jumps in income/earnings, etc... are likely to get you audited.

One of the reasons we were so worried about it, too, is that both parties have to agree and follow through with their part. For example, my sister nannied for a family for a while and was paid under the table. come tax time, they claimed her on their taxes for the child care credit, and she had to go back and pay after the fact because they didn't hold up their end of the deal. On the other hand, when we got rid of our nanny she claimed unemployment. Had we not been paying her taxes, the state would have notified the IRS and we would've ended up with all the back taxes to pay for her whole employment.

So like I said, it's a risk, and you just have to be comfortable taking that risk. I know it does work out for a lot of people, though.

I'm not going to venture into my personal experience in this, but I'll discuss it generally just as something I'm pretty familiar with as a nanny who knows a lot of other nannies and hears about how they're paid.

One option I've seen ppl take who want to pay taxes on their nanny is to pay at minimum wage with taxes removed, but then pay the difference in wages in cash. So for instance if minimum wage is $8.00, then you pay with proper taxes removed for her 40 hours at $8/hr and have that as an auto payment, then pay her each week or biweekly in cash an additional $8/hr without taxes withheld. The nanny keeps more $$, you pay less in taxes, she has a legal income, and they can't prove what you did with that cash so there's no paper trail. Just a thought for those who want to pay above the table or get paid above the table without having as much taken out.

I was a nanny for several years and was always paid under the table, but honestly I think it would have been nice at times to have proof of what I made to get approved for things like an apartment or a car loan.