While it may be tempting to pay your caregiver under the table, the penalties for doing so greatly outweigh the benefits. Not only is paying your nanny on the books the right thing to do legally, but there are also many advantages for the both of you, such as:

-People who can provide proof of their childcare expenses are able to claim the Childcare Tax Credit on their taxes every year.

-Your nanny can receive unemployment benefits when her service for you inevitably ends in the future.

-Your nanny can provide proof of income which is required to do just about anything nowadays, such as buying a car or renting a home.

There are so many rules and regulations when it comes to employing someone as a caregiver. It’s always a good idea to seek professional advice when you’re preparing to become an employer, but here are some basic guidelines to get you on the right track.

Step 1: Apply for an EIN (Employer Identification Number) with the IRS. There’s a very easy form to fill out which can be found on the IRS website (EIN Application).

Step 2: If your nanny is from a foreign country, have her fill out an I-9 form which proves her right to legally work in the United States. (Form I-9). The form will give a list of acceptable documents that she should be able to provide. There are several different types of immigration statuses which may permit your nanny to work. You can find the information on this at (USCIS Website).

Step 3: Report your nanny’s employment to the state. Every state has its own method for doing this which can usually be found on the state government website.

Step 4: Deduct taxes from your nanny’s pay. You will need to deduct several taxes, including Social Security and Medicare Taxes. It’s usually a good idea to deduct income taxes for your nanny also, but it’s not required as long as she makes her own tax payments. For a complete description of all the taxes that need withheld and how to pay them, look at the Household Employer’s Tax Guide on the IRS website for your current year. (2013 Household Employer Tax Guide).

You should keep copies of everything and have your records very well in order in case you ever need to access them for an audit. Although paying your nanny legally may seem complicated at first, mostly everything you need to get started can be done with a few clicks on the computer. As long as you stay organized and make a calendar for tax payment due dates, paying your nanny legally will be a breeze and benefit you both in the long run.