I am in nanny tax hell.

I am in the process of figuring out on nanny taxes because my husband is adamant about being legal (funny thing is he doesn't go do research himself). So I read that as long as you are planning to pay a household employee over $1,700 a year, you are required to put her on W-2, withholding taxes, paying social security, medicare, unemployment taxes....etc. I found myself reading up on IRS Publication 926 (2012) and barely understanding what's going on.

Then I found a nanny tax calculator: https://secure.gtmassociates.com/calculator.aspx

It is very depressing. Let's say you offer a 25k salary to your nanny, but her take home pay is really about $19,800. This is common knowledge for people who had experience working in the corporate America, but I have been talking to several nanny candidates now, and a big portion of them are not even used to the idea of being paid legally (!) So when they ask for 25k, they really expect to pocket 25k with no tax deduction. And I am talking about experienced, full-time nannies.

Not to mention you may have to pay an extra $600 + to hire a payroll service for the ease of mind.

Then, I talked to this other candidate. She said she is LLC'd, and she invoice her families weekly, and she has her own tax ID and all, and will do her taxes at the end of the year on her end. However, she will be working from our home. This almost sound too good to be true, but I wonder if it is even legal. I am now on hold on the phone with IRS just to see if that's even legal to do.

What is your solution to the nanny tax issue? Did you hire a payroll service, or do you figure it out on your own using Quicken/Quickbooks...etc.? Is there an easy way to do W-2, or are you working with a nanny who has LLC'd herself to provide you childcare service without you having to worry about taxes? (and if so, have you gotten into trouble with the IRS?)