Can I Pay my Caregiver in Cash?

You’ve hired a caregiver that Mom approves of, and they start next week. Now comes the important question: How will you pay them?

The question is not about how much you’ll pay. That should already have been negotiated. Rather, it is the basic question of how you will pay those wages. When you hire a caregiver privately, they may ask you to pay them directly in cash. Unfortunately, that’s neither IRS or State compliant and could result in costly fines to you down the road.

What the IRS Says About Paying Your Caregiver

The IRS classifies caregivers as household employees, not simply people hired to perform a service in your home. It justifies this distinction with several key facts:

• The IRS defines household work as work done in or around a private home, including caring for elderly or disabled family members, nannying, and in-home health aide work.
• If you decide what the caregiver does and how they do it (schedule, tasks, care routines, house rules), the IRS deems them to be an employee. This is true even if you give them a lot of day-to-day freedom.
• It doesn’t matter whether they work full or part time, are paid hourly or by the day, or call themselves a “contractor.” The actual working relationship decides their status, not the label they or you put on it.
• Independent contractors typically offer services to the public, set their own methods, and supply their own tools. Most private caregivers don’t do these things and therefore don’t qualify. They are not their own business.

A person cleaning your house who works independently, has multiple clients, and uses her own supplies is not a household employee, but a caregiver who follows your specific instructions and uses your supplies is.

That distinction is why paying your caregiver in cash is considered illegal by the IRS.

Will the IRS Find Out if You Pay Your Caregiver in Cash?

Isn’t this just the honor system, and doesn’t everyone pay in cash?

You could pay your caregiver in cash and hope the IRS doesn’t find out – until something happens that causes them to discover your transgression.

If your caregiver files for workers’ compensation or your loved one passes away and your caregiver files for unemployment, the penalties and back taxes for as long as they worked can be enormous. All it takes is one slip-up for the IRS or your state taxing authority to see they’ve been paid incorrectly, and you'll owe penalties for the misclassification.

Suppose you hire a caregiver and pay her in cash. One icy morning, she slips and falls on your front walkway, spraining her ankle. Unable to work, she files a workers’ compensation claim, and during the investigation, the State’s Workers’ Compensation Board finds that you were required to carry workers’ compensation insurance for her as a household employee but failed to do so. During their investigation, they’d be certain to discover that you did not pay unemployment insurance, taxes, or other payroll obligations; information they would pass on to the other taxing authorities.

You’re responsible for the costs associated with her workplace injury as well as unpaid unemployment insurance contributions, interest, and applicable penalties. Plus corrections to years of payroll records and tax obligations. Also, any tax obligations the employee didn't meet on their own because of your incorrect classification are your responsibility to pay (with penalties!). So there’s no risk to them whatsoever…it all falls on you. The potential cost in back taxes and penalties is simply not worth risking paying your caregiver in cash.

Is There a Way to Legally Pay Your Caregiver in Cash?

What if your caregiver insists on cash or check payments? Is there a way to oblige them while still being compliant?

Technically, yes, if you have proper documentation and records.

As long as you pay the proper employment taxes and issue your caregiver a W2, along with any state-level requirements, you are compliant. But the devil is in the details – one mistake or missed record, and you’re at risk of the IRS penalties mentioned above.

How to Withhold Taxes for Your Caregiver

Withholding taxes is technical, but it’s mostly administrative work others can do. Follow these steps to set up your caregiver as an employee of your household:

• Get an EIN for yourself as a household employer. Do not use your SSN.
• Have the caregiver complete Form I-9 to verify they can work in the U.S.
• Collect a W-4 if from the caregiver.
• Register with your state. This guide lists the steps for New York, and this guide lists the steps for New Jersey.

And then, make sure to either withhold (or pay yourself) the following:

• Social Security and Medicare (FICA). These apply to household workers you pay $3,000 or more in cash wages in 2026. You pay 7.65% as the employer, and you can withhold the same amount from their pay. Or you can pay their share yourself and not withhold.
• Federal income tax. You aren't required to withhold it from a household employee. You only withhold if the employee asks and you agree.
• Federal unemployment (FUTA). This applies if you pay $1,000 or more in total household wages in any calendar quarter.

Fortunately, you do not have to manage this entirely on your own.

At LeanOnWe, we have years of experience matching families with the right caregiver, and we partner with experienced payroll domestic employment advisors.

One of our partners, HomeWork Solutions, has 30+ years of experience helping families manage and pay household staff compliantly. Our domestic employment payroll partners can assist you with the steps above, including:

• Applying for and receiving an EIN
• Tax account setup
• Calculating and processing pay
• Withholding and remitting payroll taxes
• Unemployment insurance compliance
• Maintaining payroll records and documentation
• Workers' compensation or other insurances
• Filing federal, state, and local tax forms
• Creation of year-end documents (such as W-2s, associated filings, and Schedule H)

While the primary mission of LeanOnWe is helping you find the ideal caregiver for your unique needs, our service includes access to professional domestic payroll partners who can ensure you pay your caregiver legally and in compliance with all federal, state, and local laws. Setting it up right from the start can ultimately save your family thousands of dollars (if not tens of thousands) in the long run. Better to be smart than sorry!

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