(MONEY Magazine) – Even the toughest exec and fiercest parent is daunted by the idea of dismissing a nanny. Why? For starters, your kids get caught by conflicting loyalties. Then there's the intimidating and inconvenient prospect of hiring a replacement. Indeed, Wendy Sachs at the International Nanny Association reports that most employers need about four weeks to hire a nanny. Perhaps worst of all, terminating the babysitter means confronting your own bad judgments. Many families treat nannies, especially those who live in, as family, not employees, notes Jane McIntosh, the editor of Nanny News, a Hopewell, N.J. newsletter ($14.95 for six issues a year; 800-634-6266 for one free issue). "Dismissing that person," she says, "means facing the fact that your child wasn't in the best situation." Carmelita and Ken Smith (right), former marketing director and chairman, respectively, of a Columbus, Ohio 100-restaurant fast-food chain, learned all this the hard way. Experienced employers, the Smiths took two weeks to sort through 60 applicants, then verified references, ran a criminal background check and confidently hired a recently divorced 26-year-old woman for $6 an hour. (Average babysitter salaries range from an hourly $6 to $8, or $250 to $350 a week.) Within a month, the Smiths' new nanny had run up about $250 in phone calls to a boyfriend in Hawaii, asked for dozens of small advances on her paycheck, gone bar hopping on nights off and, almost daily, brought her own four-year- old daughter into the Smiths' home, saying the little girl was her ex- husband's daughter. Still, the Smiths did little. "We felt sorry for the woman," admits Carm. After about six months, the babysitter quit before either the Smiths' compassion or pocketbook was exhausted. "At the office," sums up Carm, "we would have had no problem firing somebody like that." Their case is not unusual, says Susan Ginsberg of Work & Family Life, a New York City corporate newsletter, adding: "People settle for intolerable situations." For example, Nanny News recently listed the top conflicts between live-in nannies and employers in order of prevalence: poor communication, opposing views on touchy subjects such as nutrition or discipline, incompatible or unacceptable lifestyles, confusion over roles, disagreements over job duties, and lost privacy. Take heed. If you're unhappy or troubled about your baby-sitter, this advice from pros and peers can help you fire her (or him) with the least amount of pain: -- Don't delay a minute if you suspect any emotional or physical abuse or neglect. "Some parents are spending $1,000 or more on elaborate surveillance systems to check up on caregivers," reports Ellen Tauscher, a former investment banker who founded the ChildCare Registry, a Danville, Calif. firm that provides parents with background checks on potential child-care workers ($175 fee; 800-227-0033). "Why take a chance? If you're going to those lengths, the bond of trust you need is already broken." Fire the person immediately, and don't forget to have your locks changed the same day. -- Don't hesitate when you suspect theft. One 27-year-old Chicago executive with a seven-month-old son was uneasy about her nanny's erratic behavior -- especially how often the sitter called in sick. One evening, when the mother arrived home from work, the nanny claimed she had seen a man leaving the apartment earlier. Yet the sitter had called neither the police nor her employer about the intruder. The mother ran to her bedroom. Her diamond engagement ring was missing. With no real proof of theft, she fired the woman on the spot, citing the nanny's poor work habits. -- When possible, line up alternative child care before acting. Says Judi Merlin, owner of Atlanta's A Friend of the Family agency: "Caregivers are sometimes willing to stay until you hire someone else if you are up front with them." You can also sweeten severance pay as an incentive. -- Shield your children from confrontational scenes. Don't lose your cool even if you arrive home at 11 p.m. to find your four-year-old wandering the house while the nanny blow-dries her hair, as happened to New Jersey mom-of-two Pam DeBlasio. Kids are likely to stop trusting babysitters if it looks like you don't. Tell the caregiver she's dismissed while the kids are at school or, if need be, hire someone to watch them while you talk. -- Severance and paid vacation time vary. The usual arrangement: two weeks' notice and one week's severance ($250 to $350) if she's been employed six to 12 months or two weeks' severance for more than a year. Most employers don't pay severance for less than a year's work, says ChildCare Registry's Tauscher. But if you haven't been paying Social Security or income taxes as required by law, watch out.

In the P.Z. era -- that is, in the post-Zoe Baird era dating from the first quarter of 1993 -- 408,000 employers filed federal taxes for household help, a jump of 17% from the 349,000 employers who filed in the first quarter of 1992. According to expert estimates, that still means less than half the million- plus householders who employ full-time sitters are paying the taxes they owe. "I've heard of hundreds of cases," warns Tauscher, "where the nanny has demanded $2,000 severance in return for not turning in the parents for tax evasion." If you haven't been filing your 942 form, come clean with the IRS before firing the help. Call 800-829-1040, or walk into your local IRS office and request a meeting. Agency spokesman Ken Hubenak says the IRS will consider forgoing stiff penalties for household employers who want to make amends, accepting back taxes and accrued interest, for example, and forgiving the additional 5%-a-month late-filing penalty and 0.5%-a-month late-payment penalty. -- Promptly inform state and federal agencies that the nanny is no longer employed. Otherwise, you may be held liable for taxes and unemployment insurance you no longer owe. -- Check your phone bill before the final paycheck. Getting stuck with excessive long-distance charges is a common complaint from families whose nannies just left, says Tauscher. However, before deducting that expense, make sure you have an authorization statement signed by the babysitter that gives you permission to do so. Most states require full wages for hours worked, says Jacqueline Clark, president of A Choice Nanny Franchise Systems, a national referral service. -- Unless it's an emergency dismissal, let your children say good-bye. Kids have a tendency to blame themselves when someone close abruptly disappears. / -- Next time, spell out your expectations. Few parents bother to take the time to write down nanny job descriptions. Yet that formality will go a long way toward helping the next babysitter do the job you want.

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UNDER PRESIDENT CLINTON'S PROPOSED NATIONAL HEALTH-CARE INSURANCE PLAN, YOU COULD PAY AS MUCH AS 4.4% OF A FULL-TIME BABYSITTER'S SALARY TOWARD HEALTH INSURANCE COVERAGE, COSTING, FOR EXAMPLE, $660 A YEAR ON A $15,000 ANNUAL SALARY.