In today's economy nannies are finding that good jobs take longer to secure. The household who let's their off-the-books nanny go, for whatever reason, should be seriously concerned about their former nanny filing an unemployment claim. The nanny who was perfectly content to receive tax fee income experiences a reality check when they have no income for weeks, or months. Suddenly, filing an unemployment claim seems the only option to avoid eviction or to put food on the table. Once that claim has been filed, the whistle is blown on the former household employer. Since state unemployment systems share this information with the IRS, everyone is on notice that the family employed the nanny and that there are no tax returns on file.

The IRS's 2010 budget request includes an increase of approximately $300 million above its 2009 appropriations for enforcement. Conventional wisdom says that IRS compliance activities recoup $5 for every $1 spent. Historically, IRS enforcement efforts step up in times of budgetary crisis. The efforts target closing the "tax gap" - the difference between taxes owed and taxes paid. The "nanny tax gap" is estimated to be more than $5 billion per year and possibly as much as $20B.

Nannies who are married, in a nanny share, or have more than one job take note:

If a nanny is married and both spouses work and both spouses had their withholding tax adjusted, they are being credited for 150% of the available credit - and may be surprised to owe several hundred dollars at the end of the year. If you work two or more jobs and have withholding from each, you may be being under-withheld because each job treats your withholding tax calculation as if you are working only for them. Nannies in a nanny share have to be particularly vigilant that both jobs are taking into account your TOTAL income, not just the portion they pay individually, when calculating your withholding.

An Arkansas couple, in a highly unusual proceeding, was sentenced to jail time for failure to file and pay employment tax returns.

Mary I. Miller and her husband, Walter Randall Miller, pled guilty on March 24, 2003 to one count each of conspiring to defraud the United States by failing to file employment-tax returns or pay employment taxes from 1994 to 2002. The couple were both sentenced to five years of probation, conditioned on their agreement to a restitution agreement with the IRS.

The very challenging economic climate we find ourselves in has some predictable effects on nanny payroll. Many nanny employers, when faced with a job loss or income reduction, need to take immediate steps to change their household expenses, and firing the nanny is often an unfortunate consequence.

When the employee (nanny) is involuntarily discharged, the timing of final wage payments is governed by state law. California for example requires that the discharged nanny be paid all wages due immediately at the time and place of discharge. The District of Columbia, Illinois and New York (and many other states) require that all wages to the discharged nanny be paid no later than the next business day.

The Bureau of National Affairs (BNA) reports "The issue of who is an independent contractor and who is an employee is getting more attention from lawyers and from cash-starved states, attorneys said during a recent session of the Labor and Employment Relations Association's annual meeting."

Montgomery County MD passed legislation requiring that domestic workers (nannies, housekeepers, maids, companions) be provided a written employment agreement effective January 18, 2009.