Every other family you know pays their household staff cash under the table. Nobody deals with payroll taxes or workers compensation or any of that complicated expensive stuff. they just hand over cash every week and everyone’s happy. It seems so much simpler and cheaper than setting up legal payroll. But you’ve also heard vague warnings about legal problems and tax issues and getting in trouble if you don’t do it properly. You’re trying to figure out whether to just do what everyone else does, or whether you should actually set up legal household employment and pay all the taxes and insurance.
Here’s the truth from Seaside Staffing Company. we work with families in Los Angeles and everywhere else, and this question comes up constantly. Paying household staff under the table is illegal, it creates real risks for you, and in many situations it hurts your staff too. But plenty of families do it anyway because they don’t understand the actual consequences or they figure they won’t get caught. Here’s what you’re actually risking by paying cash under the table, and why legal employment is worth the extra cost and hassle.
Why Families Pay Cash Under the Table
The reasons families avoid legal household employment are pretty straightforward. It’s significantly cheaper. you avoid payroll taxes that add 15-20% to your costs. It’s simpler. no dealing with payroll companies, tax forms, or filing requirements. You don’t have to learn employment law or worry about compliance. Your staff member might ask for cash payment because they don’t want to pay taxes either, they want to keep collecting unemployment or disability, or they’re undocumented and can’t work legally. Nobody else seems to get in trouble for it, so it feels like a victimless arrangement where everyone benefits.
At Seaside Staffing Company, we hear all these rationalizations constantly. A family in Los Angeles’s Brentwood told us “everyone we know pays their nanny cash, it’s just normal here.” They genuinely believed that because it’s common, it’s somehow okay or legal. It’s not. Just because lots of people do something illegal doesn’t make it legal or eliminate the risks.
What You’re Risking When You Pay Cash
The risks to you as the employer are real and significant, even if they feel unlikely. If your household employee gets injured at work. falls, cuts themselves, hurts their back. and you don’t have workers compensation insurance, you’re personally liable for their medical bills and any legal claims. If they decide to sue you for unpaid wages, unpaid overtime, or wrongful termination, the fact that you paid cash under the table doesn’t protect you. it actually makes things worse because you violated labor laws. If they apply for unemployment after you let them go, the state will investigate where they worked and discover you never paid employment taxes. You could owe back taxes, penalties, and interest going back years. If the IRS audits you and discovers you paid household employees without filing the required tax forms, you face significant penalties.
If you run a business and use your household employee for any business-related tasks. having your nanny watch your kids while you work from home, for example. you lose potential tax deductions you’d get with legal employment. If your household employee is injured or gets sick and files for disability or Social Security benefits, they’ll have no work history because you paid cash, which means they’re not building credits toward their future benefits. And if you ever need to verify their employment for any reason. background checks, mortgage applications, anything official. you have no documentation.
At Seaside Staffing Company, we’ve seen families get hit with all of these consequences. A family in Santa Monica paid their housekeeper cash for three years. The housekeeper fell and broke her arm at work. Without workers comp insurance, the family was on the hook for tens of thousands in medical bills and then got sued for additional damages. The total cost was way more than three years of payroll taxes would have been.
What Happens If You Get Caught
Getting caught paying household employees under the table has serious consequences. The most common way families get caught is when an employee files for unemployment. the state investigates, discovers unreported employment, and comes after you for back taxes. Workplace injury claims trigger investigations. Disgruntled employees reporting you to authorities. Divorce proceedings where financial records get scrutinized. IRS audits. Sometimes neighbors or other families reporting illegal employment to authorities, though this is less common.
When you get caught, you owe back payroll taxes for however many years they can prove you employed someone without reporting it. usually the statute of limitations is three to six years. You owe penalties and interest on those back taxes. You might face fines for failure to carry required workers compensation insurance. In extreme cases, particularly with undocumented workers, you could face criminal charges though this is rare for typical household employment. Even if you avoid criminal issues, the financial hit from back taxes, penalties, and interest can be massive.
At Seaside Staffing Company, we know families who’ve faced bills of $30,000-$50,000 or more for back taxes and penalties when they got caught after years of paying cash. A family in Los Angeles paid their nanny cash for five years. When they let her go, she filed for unemployment. The Employment Development Department investigated, discovered five years of unreported household employment, and hit the family with over $40,000 in back taxes, penalties, and interest. Way more than just paying legally from the beginning would have cost.
How Legal Household Employment Actually Works
Setting up legal household employment isn’t as complicated as people think, though it does require some work. You hire your household employee as a W-2 employee, not a contractor. You get an Employer Identification Number from the IRS if you don’t have one. You set up household payroll either through a household payroll service or with an accountant who handles household employment. Every pay period, you withhold required taxes and send them to the appropriate agencies. You file required quarterly and annual employment tax returns. You get workers compensation insurance for your household employees. You provide a W-2 at the end of the year for your employee’s taxes. You maintain employment records. hours worked, wages paid, taxes withheld.
This sounds like a lot, but household payroll services handle most of it for you for relatively modest fees. typically $50-150 per month depending on the service and number of employees. They calculate taxes, file forms, handle W-2s, and keep you compliant. At Seaside Staffing Company, we recommend families use a household payroll service because trying to do it yourself is where mistakes happen. A family in Pasadena uses a household payroll service for their two employees. a nanny and a housekeeper. They pay about $100 per month for the service, which handles all payroll taxes and compliance. It’s built into their household budget and they never worry about legal issues.
The Real Cost of Legal Employment
Legal household employment costs more than paying cash, but not as much more as people think. The main additional cost is employer payroll taxes. Social Security, Medicare, unemployment insurance. This adds roughly 10-15% to your cost. Then there’s workers compensation insurance, which varies by state and role but typically adds another 2-5% to your cost. Payroll service fees add another small amount. In total, you’re looking at maybe 15-20% more than just the wages.
So if you’re paying a nanny $40,000 a year in salary, legal employment probably costs you around $48,000-$50,000 total with all taxes and insurance. That $8,000-$10,000 difference is what you’re “saving” by paying cash. but you’re taking on massive risk to save that amount. At Seaside Staffing Company, when we explain the actual numbers to families, many realize the savings from paying cash aren’t worth the risks. A family in Beverly Hills was paying their house manager $75,000 cash annually. When they ran the numbers on legal employment, it would cost them about $90,000 total. They decided that $15,000 annual difference wasn’t worth the potential for $50,000+ in back taxes if they got caught.
Why Some Staff Want Cash Payment
Your household employee might ask to be paid cash. Sometimes they don’t want to pay taxes on income. Sometimes they’re collecting unemployment or disability and aren’t supposed to be working. Sometimes they’re undocumented and can’t provide work authorization. Sometimes they just don’t understand the benefits of legal employment. None of these reasons make it okay for you to pay cash, and none of them eliminate your legal obligation to pay taxes and carry insurance. If staff can’t work legally because of immigration status, that’s a separate issue. you can’t employ them regardless of how you pay them.
At Seaside Staffing Company, we tell families not to accommodate requests for cash payment. If someone insists on cash, that’s a red flag. Good, professional household staff want legal employment because it protects them and builds their work history. A family in Los Angeles had a nanny candidate who insisted she’d only accept cash payment. They pushed back and said they only do legal employment. She declined the position. A few months later they learned she’d been working for several families simultaneously, collecting cash from all of them, which she couldn’t have done with legal employment where hours and wages are documented. Their insistence on legal employment protected them from that situation.
When Staff Say Cash Benefits Them Too
Household employees sometimes argue that cash payment benefits them because they take home more money without tax withholding. This is shortsighted and actually hurts them in multiple ways. They’re not building Social Security credits toward retirement. They have no documented work history for future job applications, mortgages, or anything requiring proof of income. If they’re injured at work and you have no workers comp, they have limited recourse for medical bills and lost wages. They’re not building unemployment insurance credits they could collect if they lose their job. They’re breaking tax law by not reporting income, which could cause them problems. They’re often working for employers who might take advantage of them because the employment is off the books.
At Seaside Staffing Company, we educate household staff on why legal employment is better for them even though the take-home might be slightly less. Good employers who pay legally are usually better employers overall. they’re more professional, more likely to provide benefits and fair treatment, more stable. A nanny in Los Angeles didn’t understand why a family insisted on legal employment instead of cash. Five years later when she applied for a mortgage, she had documented income history that helped her qualify. Friends who’d been paid cash for years couldn’t prove their income and struggled to get approved for anything requiring income verification.
The 1099 Contractor Loophole Doesn’t Work
Some families try to classify household employees as independent contractors and give them 1099s instead of W-2s. This seems like a middle ground. you’re reporting the income but avoiding payroll taxes and workers comp. The problem is household employees are almost never legitimately independent contractors under law. The IRS and states have specific tests for contractor versus employee status, and household workers who work regular hours in your home under your direction are employees, not contractors. If you misclassify them and get caught, you owe all the payroll taxes you should have been paying plus penalties, and your “contractor” might sue for employee benefits they should have received.
At Seaside Staffing Company, we warn families constantly about the contractor misclassification approach. It’s not a legal loophole, it’s just a different way of breaking the law. A family in Malibu gave their housekeeper a 1099 for three years thinking they were following the rules. The state audited them during a workplace injury claim and determined the housekeeper was clearly an employee, not a contractor. The family owed back payroll taxes for three years plus penalties for misclassification.
What About Really Part-Time or Occasional Help
If you hire someone for just a few hours once a week or occasionally, does that change anything? Not really. the threshold for household employment taxes is very low. Once you pay someone $2,600 in a year (as of 2024), you’re required to pay Social Security and Medicare taxes. That’s about $50 a week. If you’re paying a housekeeper to come twice a month for a few hours, you’ll hit that threshold. The only time you might be exempt is truly occasional help. a teenager who babysits once a month, someone who helps with a party once a year. Regular ongoing help requires legal employment even if it’s part-time.
At Seaside Staffing Company, we tell families that if someone works for you regularly, set up proper employment. Don’t try to stay under thresholds. it rarely works and creates risk. A family in Los Angeles had a housekeeper come once a week for four hours at $25 an hour. They thought this was too small to bother with legal employment. It wasn’t. they were paying $100 weekly, over $5,000 annually, well above thresholds. When she filed for unemployment between clients, they got caught and owed back taxes.
Making the Switch from Cash to Legal
If you’ve been paying cash and want to switch to legal employment, you can. You don’t have to confess past cash payments to do this. you just start doing it right going forward. Tell your household employee “We’re going to start doing payroll legally going forward with proper tax withholding and documentation.” They might resist because their take-home will decrease, but explain the benefits to them. Set up with a household payroll service and start processing properly. The IRS doesn’t come looking for past cash payments unless you get reported or audited, so making the switch now reduces future risk even if it doesn’t eliminate past exposure.
At Seaside Staffing Company, we help families make this transition. A family in Westwood had paid their nanny cash for two years. They realized the risk wasn’t worth it and switched to legal payroll. The nanny wasn’t thrilled about lower take-home, but they explained the benefits and slightly increased her gross pay to soften the change. Three years later, she thanked them because the documented employment history helped her buy a car and qualify for credit.
Paying household staff under the table might seem easier and cheaper, but the risks are real and the consequences of getting caught are expensive and stressful. Legal household employment costs more upfront but protects you from massive back tax bills, lawsuits, and penalties. Use a household payroll service to handle the complexity. Budget for the real total cost including taxes and insurance. And hire staff who are comfortable with legal employment. that’s usually a sign they’re professional and have nothing to hide. The short-term savings from paying cash aren’t worth the long-term risk.
