Hiring a nanny is more than just the search for the right person, it also involves all the work of being an employer. In addition to paying a salary (or hourly wage), as your nanny's employer you're responsible for paying payroll taxes, which include at least federal and state unemployment insurance tax and FICA.
Nanny tax compliance makes the news most often during election seasons, when a politician or two may admit to nanny tax evasion. Politicians aren't the only casualty, they just happen to be in the public eye. In 2006, the IRS reported that about 225,000 people paid taxes on household help, which includes nannies and estimates that the number is probably much higher -- up to 770,000 child care workers are allegedly employed by private families.
The bottom line is if you pay your nanny more than $1,500 a year, you're going to get hit with nanny tax.