Defining "The Nanny Tax": Why and How Taxes Apply to Babysitters (& Others)

Disclaimer: This article is provided with the understanding that neither iVillage nor Sittercity are rendering any advice, whether express or implied, related to taxes or the law, and iVillage and Sittercity encourage you to seek appropriate professional advice for any situation or problem you may have.

When Caroline Kennedy took herself out of the running for Hillary Clinton's senate seat, it was whispered that her withdrawal was due to "a tax problem" and "a potential nanny issue." At that point, the complicated topic of nanny taxes was thrust into the news, raising more questions than answers among nanny-employing families. But did you know that families who use babysitters may owe those exact same taxes?

It's often called "the nanny tax," but it actually applies to all types of household employees—including that occasional babysitter you call on a few times a month. In fact, under most circumstances unless your sitter is your spouse, your parent, your under-21 child or someone under 18 whose main occupation is not household employment (i.e., a student), then you have to pay the tax if you have paid that person $1,600 or more annually in 2008 ($1,700 or more in 2009).

To most parents, the subject of paying taxes to a "household employee"— especially a babysitter—is an intimidating topic, muddled by endless numbers, confusing forms, ambiguity and plain old fear. The common belief that paying a caregiver "under the table" saves parents a lot of time and paperwork isn't always the case—nor is it legal. Kennedy's own situation shines a spotlight on the importance of understanding and paying these household employee taxes—not even political royalty can avoid the consequences of tax confusion.

Before you get buried in tax forms, let's break it all down in clear and simple terms:

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