I'd like to repeat a point made earlier: Her employer's current behavior is illegal: nanny is a household employee.
Your wife is missing out on potential unemployment protection funds, social security's understanding of her work history (could affect later payout), and the employer's contribution to her taxes.
Note also that even as an IC, her employer would have had to provide her a 1099.
It's certainly possible that the employer is well-intentioned but ignorant, and that kindly informing them that she wants her W2 would be taken well. It has been startling to me how many friends & acquaintances we've encountered who are not properly employing their nanny.
We have employed a nanny for years, and I'm proud to be doing so legally, despite the additional cost.
I can recommend Patriot Payroll for an excellent, easy, and inexpensive solution to the paperwork overhead (which I otherwise found overwhelming).
