Hiring a nanny can be stressful, after all—you’re inviting someone to care for your precious baby.

The stakes are high, and you want to get it right.

The good news is there are (literally) millions of other mamas in your boat, and lots of experts available to help you make the right decision.

(And we promise, it will be okay, mama!)

One of the many things to consider when choosing the right childcare option for your family is how it fits into the budget.

If you’re leaning toward or have decided that a nanny is a best, it’s important to make sure that you’re meeting your legal obligations.

Kerri Swope, senior director of Care.com’s HomePay, answered our questions about the “Nanny Tax” and the things we need to make sure are taken care of when hiring a nanny.

What is the “nanny tax?”

When a family employs a nanny (or any other household employee) and pays them more than $2,000 within the calendar year (effective 2016), they are responsible for withholding and paying taxes.

The “nanny tax” is the common phrase that pertains to the taxes a family needs to withhold from their employee as well as the taxes the family is required to pay as the employer. To get specific, this typically includes Social Security and Medicare (collectively known as FICA) and federal and state income taxes that are withheld from the employee each pay period.

As the employer, the family will also pay a matching portion of FICA, as well as federal and state unemployment insurance taxes.It’s important to remember that federal and state unemployment insurance taxes generally come into play when a family pays their employee $1,000 or more in a calendar quarter.

Usually a family will cross both the FICA and unemployment insurance tax thresholds, but sometimes that’s not the case. Regardless of your situation, it’s important to note that this can vary state by state, so families need to do their research to see what pertains to their needs.

Why do I need to pay the “nanny tax”?

The short answer is, because it’s the law. The IRS sets guidelines for families with household employees in Publication 926. It goes through all the federal requirements for withholding and paying taxes. If a family chooses not to follow these requirements, they can face tax evasion charges, be forced to pay back taxes, penalties and interest, and in some cases, lose their professional license.

Are there any exceptions?

Yes. In most cases, if the person you hire is your spouse, your child (if under 21), your parent, or someone under the age of 18 (if the job isn’t their primary occupation, i.e. they are a student), you are not responsible for going through the nanny tax process. Additionally, if you do not meet the FICA or unemployment insurance tax thresholds, you won’t have to deal with any nanny taxes. The FICA threshold in particular is very easy to hit and, when broken down, equates to roughly $39 a week or $170 a month. A lot of families underestimate this and can create more work for themselves if they don’t calculate this ahead of time.

What happens if I get caught not paying?

As of April 2006, the IRS started to crack down on employers who pay their employees under the table. Should you meet the $2,000 threshold and decide not to pay the appropriate taxes, you put yourself and your family at financial and legal risk. This can include tax evasion charges, back taxes, and penalties and interest. For those that have a professional license, such as a CPA or attorney, they’re also in jeopardy of losing that license. Now more than ever, it’s important to be cautious.

Doesn’t this make having a nanny more expensive?

When families hire a household employee and realize compliance involves taxes and tax filings, they immediately assume it will be expensive and time-consuming. The good news is it’s neither! Many families have access to tax breaks that can offset most – if not all – of the employer taxes. And services like HomePay were built to take all the employer-related paperwork off a family’s plate, not to mention the fees associated are tax deductible as professional service fees. There is even a nanny tax calculator that families and caregivers and leverage to help estimate these costs!

What tax breaks are available to help cover childcare costs?

When families pay their caregiver legally, they earn the ability to capitalize on one or more tax breaks that can offset most – if not all – of the employer tax cost.There are two main options that families can leverage, which include a Dependent Care Account and the Child Care Tax Credit. First, the Dependent Care Account, also known as a Flexible Spending Account is one that many companies offer their employees. Essentially, employees can contribute up to $5,000 of their pre-tax earnings to this account to help pay for childcare expenses. This means there is no federal income tax, state income tax or FICA taxes on that income, saving a family about $2,000 a year. Also available is the Child Care Tax Credit. If a family doesn’t have access to a Dependent Care Account, they can claim the Tax Credit for Child or Dependent Care (IRS Form 2441) on their personal federal income tax return at year-end. This tax credit saves $600 for families with one child or $1,200 for families with two or more kids.

What are the benefits for my nanny?

Whether it’s a nanny, housekeeper or even your pet sitter, household workers are important to our lives and deserve professional benefits and security for the jobs they do. When paying compliantly, a family provides such benefits to their employee, which can include a tangible employment history, which is important for creditors; unemployment benefits; health insurance subsidies (dependent upon the employee’s income level among other factors); and Social Security and Medicare benefits upon retirement. These benefits are essential to the employee in both the short- and long-term.

If I’m in a nanny share, how do the taxes work?

When a family is in a nanny share, each is viewed as a separate household employer in the eyes of the law, even if the care is provided in only one of the homes. Essentially, the nanny takes direction from both families and both families share in the expense of her pay.

Each family is required to establish themselves as a household employer with the IRS and the state, each paying the nanny separately. This includes withholding and remitting payroll taxes appropriately to the IRS and state agencies on their portion of her salary.

While it may seem easier to have one family handle tax withholdings and remittance on the full salary, this creates risk for the family who is not registered as a household employer with the IRS and the state tax agencies. In addition, there is risk for the family who pays the nanny in full and then has to collect from the second family.”

To clarify: If two families hire the same nanny to care for their children, but the care is provided separately, this is not a nanny share arrangement. This is different because the children are not cared for as a group—the nanny works for one family at a time and the children are cared for in their home. In this case, the nanny has two part-time jobs.