Yes, what you are doing is illegal. And no - certainly not "everyone" employs illegally.

Yes, you do. Here is the IRS publication you need to read. I suspect you will decide not to do anything about it, but now you can't say no on ever told you:

https://www.irs.gov/pub/irs-pdf/p926.pdf

Do you have to deduct taxes when you pay your nanny? Do you have to report it to the IRS if you just cut her checks without taxes taken out? Our nanny is has been living with us for 2 years. She isn't exactly legal. We just cut her bi weekly checks. Is it our responsibility to make sure we take out taxes or gets? She doesn't pay taxes so just wondering how illegal this really is. My husband says everyone does this but I'm a little concerned after a friend told me a story about a friend doing the same thing.