You’ve recently become proud parents. As soon as you found out you were expecting, you probably started considering your child-care options. Do you put the baby in daycare, or do you hire a nanny to care for your child in your home?

If you go the nanny route, you have a couple options: You can hire a nanny through a professional nanny service, which costs quite a bit more but has a number of advantages:

• The agency screens candidates and checks references for you.
• The agency provides temporary nannies to fill in when your nanny is ill or takes a vacation or simply doesn’t show up.
• The agency carries liability insurance in case one of your children is injured in the nanny’s care. (Most self-employed nannies don’t have any liability insurance.)
• The agency carries workers’ compensation insurance covering the nanny if she’s injured on the job, regardless of fault. This significantly reduces the chance of the nanny suing you for a job-related injury.
• The agency does all the withholding, pays all the payroll taxes, and issues the paychecks to the nanny so you don’t have to.

Not all nanny services provide all these benefits, so make sure you understand what you’re getting into before you sign on the dotted line.

A second option is to hire your own nanny. You can hire her as an independent contractor, a common approach but one that has liability and potential tax consequences that aren’t, in my opinion, worth taking. A better and safer choice is to hire your nanny as an employee. Yes, you’ll need to cut her a paycheck and do some withholding. And, depending on what state you’re in, you may need to buy workers’ compensation insurance for her. (Check with your state’s department of labor for information on workers’ compensation requirements for domestic employees. Many states exempt you from having to provide the coverage for a single employee.)

If you’re required to buy workers’ compensation insurance, you benefit in two ways:

• The nanny is prohibited by law from suing you if she gets hurt on the job.
• The nanny can collect for her medical bills and lost wages from your workers’ compensation policy, regardless of how it happened.

For more information on household employees and the IRS rules, go to http://www.irs.gov/publications/p926/index.html or call 800-829-3676 and request Publication 926: Household Employer’s Tax Guide.

If your nanny will be driving your child or picking them up as part of her duties, your child could be injured in a car accident caused by the nanny’s negligence. Here are some steps you can take to protect yourself and your child before you hire the nanny:

• Get her signed permission to check her driving record. Request her driver’s license number and vehicle plate number. Then provide both numbers and her signed permission to your auto insurance agent and request her driving and accident records. If her record isn’t clear for at least three years, look into other candidates.
• Get proof of her automobile insurance liability coverage if she uses her own car. Make sure both her liability coverage and uninsured/under-insured motorists coverage are at least $300,000. If not, ask her to increase them to at least that level. Offer to pay the additional cost if need be. The cost for extra liability coverage is very small – $50 to $100 a year tops.
• Add her as an occasional operator to your car insurance if she’ll be using your car regularly.