I recently hired a live-in-Nanny whom I am providing free Rent and Utilities and paying $100/week gross. She is not making a great deal of income and I do not want to shaft her in terms of Taxes but am trying to think of the best way to do the taxes. I do not have a great deal of money and that's why room/utilties is part of her compensation.

Please explain the difference between 1099 and W-2 other than she has to pay 15.33%. If I claim her wages on my taxes, how does that work 1099 versus W-2? What other things should I consider prior to deciding which avenue to go? I know I'm not supposed to pay her 'under the table' but if she wants that does that mean I do not get to claim 'childcare expenses' on my taxes? This is my first child and so I need direction - thanks

You shpould pay her using a W2, not a 1099, as she is not considered to be an independent contractor. You may not need to withhold any taxes at all, other than SS. And of course you may caim the child care credit only if you can prove you actually paid her - another reason for the W2. You will need to check that the nanny is legally allowed to work, and you'll need to get an Employer Identification Number. It's really not all that difficult - here's a good web site that describes what you need to do in more detail:
How to Pay the Nanny Tax - Guide to Paying the Nanny Tax to Your Household Employees (http://workingmoms.about.com/od/finances/ht/Nannytax.htm)