The IRS has specific rules determining if a worker is an employee or, instead, an independent contractor. Those rules look beyond labels and examine a worker’s actual relationship with a business. In general, if the business has the right to control or direct what is done and how it is done, the worker is an employee.

Parents usually exercise a great deal of control over a nanny. They tell the nanny when and where to work; what the children should eat; what discipline may be appropriate; when the children should take naps; and more. Even if parents give a nanny flexibility in his or her job, they still retain the right to direct the nanny care. For that reason, nannies are nearly always classified as employees and not independent contractors.

Parents who misclassify a nanny as an independent contractor can end up with substantial tax bills, penalties, and interest. To avoid these problems, parents need to treat a nanny as an employee. As a first step, parents and the nanny should enter into a good nanny contract.