If you've been paying your babysitter or other household worker in cash, you just might be the unassuming neighborhood evader of what's nicknamed the "nanny tax," which also applies to babysitters, housekeepers, private nurses and gardeners.

Don't panic just yet. If you pay a household worker less than $1,900 per year, you qualify for what's called the "casual babysitting exemption."

But $1,900 per year can be a very low threshold, especially if you live in a big city like New York. My 17-year-old stepdaughter's standard hourly rate for babysitting is $12, but she lives in laid-back San Diego. I wouldn't be surprised if parents on the Upper East Side of Manhattan routinely pay $20 or more, especially to caregivers older than 18.

Let's do the math. If the annual exemption threshold is $1,900 and you're paying $20 per hour, that's less than two hours a week of care before you cross the line. Leaving the kids with the sitter to dine out with your spouse one night a week could end up costing you well more than two orders of pad Thai and a large Singha if you pay under the table and the Internal Revenue Service catches you.

Getting Caught and Being Penalized

How would the IRS catch you? These two are the most common ways, especially when considering nannies and other employees who work full-time or close to full-time:

• If your employee files for unemployment benefits after her employment with you ends.
• If your employee retires and applies for Social Security and Medicare benefits.

If your former employee provides her work history to state or federal agencies to collect benefits, the gig is up. By not accepting your duties and obligations as a household employer, not only are you hurting your former employee's ability to obtain these important government benefits, you are also setting yourself up for fines, penalties, back taxes and interest. In certain cases, penalties can include losing professional licenses, which should make lawyers, accountants, doctors and dentists particularly attentive to this issue. Aspiring government officials and politicians have also lost out.

Consider current employees, too. If they want to qualify for health insurance subsidies under the Affordable Care Ac, they need to have a record of verifiable income.

What the IRS Says

Think you can classify your nanny as an independent contract and avoid all the fuss? Think again. IRS Publication 926 states who is and isn't considered an employee, and in nearly all cases nannies are considered employees. When you are a household employer, you have obligations to withhold and pay taxes. The employer contribution includes Social Security, Medicare, federal unemployment and state unemployment taxes. The employee withholding includes Social Security and Medicare and sometimes federal, state and city income taxes.

Companies such as Care.com can calculate the numbers and process all the paperwork. According to Tom Breedlove, director of the site's HomePay service, "For many families, the available tax breaks will offset most if not all of the employer's tax cost and families can come out ahead." If your employer offers a Flexible Spending Account, you can pay for some or all the care using pre-tax dollars. Many families might also be eligible for the Child and Dependent Care tax credit. Referring to the available tax credits, Breedlove notes, "What we find is that people are almost always pleasantly surprised."

Let's say I live in Southern California and I'm a telecommuting employee of a corporation who has to travel to the physical office one day a week. I hire an adult babysitter who stays at my house with my toddler for eight hours every Monday. I have two choices: I can pay her in cash under the table at $10 per hour (or $80 per week) or I can leverage government tax breaks and my company-provided FSA and pay her legally. According to Care.com's HomePay calculator, I can maintain my $80 per week budget by setting her gross pay at $95 a week. I pay $10 in taxes, $17 to Care.com HomePay for providing the payroll, filing and related services, and receive $42 in tax breaks. Instead of earning $10 per hour, my babysitter earns $9.55 per hour. That's pretty close.

The $6,864 Question

What about a couple who needs more care? Let's say I live in Brooklyn, and my husband and I need three days of care a week (eight hours a day) for our two small children. If we have a budget of $500 per week for care but neither my company nor my spouse's offers an FSA, according to the calculator, I'll be able to pay her $15.34 an hour legally. If I pay her under the table at $15.34 per hour, it will cost me $368 a week -– much less than $500.

The $132 a week difference adds up to $6,864 annually. It's up to you if you want to take the risk of being caught, but the law is the law. Besides, Breedlove advises that recently passed and pending federal and state legislation, such as New York's Domestic Workers' Bill of Rights, is raising awareness of household employer's obligations among employers and domestic workers.

So the next time you interview a potential babysitter or any type of household worker, you might be surprised to find that he or she wants to be put on your payroll.