Hiring a nanny can be an enormous help for busy parents balancing work and family life. However, it also introduces new financial and legal responsibilities, particularly when it comes to paying taxes. The so-called nanny tax often catches new household employers by surprise. Many people assume that paying in cash avoids the paperwork, but the Internal Revenue Service has strict rules in place that make it clear: if you hire a nanny and meet certain payment thresholds, you may owe employment taxes.
Understanding whether your household worker qualifies as an employee, what taxes are involved, and how to stay compliant with federal and state regulations is essential. This guide walks you through what the nanny tax entails, who is exempt, and what your responsibilities are when you bring someone into your home to help care for your children.
Who Qualifies as a Household Employee?
To determine whether you owe nanny taxes, you must first establish whether your worker qualifies as a household employee. A household employee is someone who works in or around your private residence, performing duties such as childcare, cleaning, cooking, or gardening, under your control and supervision. This means you dictate not only what work is to be done but also how and when it is done.
A person who fits this description is considered an employee rather than an independent contractor. This distinction is crucial because it affects how taxes are handled. Independent contractors are responsible for their own taxes, while household employees require their employers to handle withholdings and contributions for Social Security, Medicare, and sometimes unemployment insurance.
Common Examples of Household Employees
Household employees can include:
- Nannies who provide child care in your home
- Housekeepers or maids
- Home health aides
- Private nurses
- Cooks or personal chefs
- Gardeners and yard workers
- Drivers or chauffeurs for personal use
If these individuals work in your household and you control how their tasks are performed, they are most likely employees in the eyes of the IRS, and you must manage their tax obligations accordingly.
Exceptions to the Rule
There are specific cases where you may not be required to pay nanny taxes, even if someone is caring for your children or assisting in your household. The IRS outlines several key exceptions:
- If the person caring for your child is your spouse
- If the caregiver is your child and under the age of 21
- If the worker is your parent (in most cases)
- If the individual is under 18 and their primary occupation is something other than household work
These exceptions are particularly common in informal caregiving arrangements involving family members. Additionally, high school or college students who occasionally babysit on weekends or evenings are usually not considered household employees. If the work is casual, infrequent, and does not meet income thresholds, nanny taxes generally do not apply.
Financial Thresholds That Trigger Nanny Tax Responsibilities
Two key financial thresholds determine whether you are legally obligated to pay employment taxes for your household employee:
- You pay $2,000 or more to a single household worker during the calendar year
- You pay a total of $1,000 or more to all household employees in any calendar quarter
If either of these thresholds is met, you must begin withholding and paying applicable taxes. These limits are subject to change based on inflation, so checking current IRS standards annually is recommended. Meeting or exceeding these thresholds means you’re no longer in casual babysitting territory—you are an employer with tax responsibilities.
Why Paying Cash Doesn’t Eliminate Tax Liability
Many families choose to pay their nannies in cash because it seems simple and informal. However, paying in cash does not relieve you of your legal duties. The IRS still considers cash payments as taxable wages, and failure to report them can lead to penalties, interest, and back taxes.
The risks of under-the-table arrangements are significant. If your nanny applies for unemployment benefits or suffers an injury on the job, a lack of official records can trigger an investigation. The IRS may also inquire about repeated or significant cash withdrawals from your accounts, especially if you’re ever audited.
Complying with nanny tax rules offers protection for both you and your employee. It ensures the worker earns Social Security and Medicare credits and can access unemployment or disability benefits if needed.
Establishing a Legal Employment Relationship
If you’ve determined that your worker is a household employee and you’ve met one or both of the payment thresholds, it’s time to formalize the employment relationship. This starts with collecting essential documents from your employee:
- A Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)
- A completed Form I-9 to verify employment eligibility
- A completed federal Form W-4 to determine income tax withholding preferences
- Any applicable state income tax withholding forms
Some states have additional paperwork, such as registration forms for new household employers. Contact your state’s labor or revenue department to understand what is required in your jurisdiction.
Setting Up Withholding for Social Security and Medicare Taxes
Once employment is official, you must withhold and pay Social Security and Medicare taxes if the employee earns at least $2,000 during the year. These taxes are shared between the employer and the employee.
You are required to:
- Withhold 7.65 percent from your employee’s wages for their share of Social Security and Medicare taxes
- Match that amount yourself, for a total tax of 15.3 percent
You can choose to pay both the employer and employee portions without deducting your employee’s share from their paycheck, but that is optional. The IRS will still expect a full 15.3 percent remittance regardless of how you split the burden.
Income Tax Withholding: Optional but Helpful
Federal income tax withholding is not mandatory for household employees, but it can be done if both you and the employee agree to it. The employee must fill out a W-4 form, and you’ll use IRS Publication 15 to determine how much to withhold each pay period.
While it’s optional, income tax withholding can benefit your employee by making their tax filing easier and avoiding a large bill at year’s end. If you do not withhold income tax, the employee may need to make estimated quarterly payments on their own.
Paying State Employment Taxes
In addition to federal taxes, many states require household employers to pay or withhold state income taxes and unemployment insurance contributions. These rules vary by location. Some states have online portals for household employers to register, submit payments, and file required forms.
If you live in a state with income tax, check with your state’s department of revenue or tax commission to determine your specific responsibilities.
Avoiding Penalties with Quarterly Payments
To manage the burden of employment taxes throughout the year, many household employers choose to make estimated quarterly payments to the IRS using Form 1040-ES. This prevents a surprise tax bill when you file your personal tax return and reduces the risk of underpayment penalties.
Another option is to adjust your own W-4 at your job to withhold more taxes to cover your household employment tax obligations. If you or your spouse are employed and receive wages, this method can simplify your overall tax process.
Preparing for End-of-Year Tax Reporting
At the end of the calendar year, you’ll need to prepare tax forms for your household employee. This includes:
- Form W-2, which reports the employee’s total wages and withholdings
- Form W-3, which is a summary of all W-2s filed and must be sent to the Social Security Administration
- Schedule H, which is attached to your personal income tax return and reports all household employment taxes
Schedule H combines all your federal employment taxes into one form. You’ll report Social Security, Medicare, and any federal unemployment taxes owed. It allows household employers to remain individuals rather than becoming business entities.
Keeping Accurate Records
Keeping detailed records is essential for compliance and to support any tax filings or audits. Your records should include:
- Copies of all completed forms (W-4, I-9, W-2, etc.)
- Pay stubs or logs of hours worked and wages paid
- Tax amounts withheld and paid
- Dates of employment and rate of pay
- Any written contracts or agreements with your employee
These records not only help with accurate reporting but also serve as proof of compliance in the event of an audit or dispute. The IRS generally recommends keeping employment records for at least four years after the date the tax becomes due or is paid.
A Step-by-Step Guide to Managing Household Employment Taxes
Once you’ve confirmed that your household worker qualifies as an employee and your payments exceed the required thresholds, the next step is to comply with all applicable tax rules. Paying employment taxes on nanny wages may seem daunting at first, but it becomes manageable when broken down into clear steps.
From collecting employee documentation to filing year-end tax forms, staying organized is key to ensuring that your obligations are fulfilled accurately and on time. We will guide you through each phase of the process, helping you stay compliant with federal and state requirements while minimizing the chance of costly mistakes.
Step 1: Request and Maintain Key Employee Documentation
Before paying your household worker, collect specific documents that establish their eligibility to work and help you determine proper tax withholding. These include:
- Form I-9, Employment Eligibility Verification, to confirm legal work status
- A Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)
- Federal Form W-4 to determine income tax withholding, if applicable
- Your state’s income tax withholding form (if your state collects income tax)
You should also keep a record of your employee’s full legal name, address, and agreed pay rate. Keeping copies of all completed documents on file ensures a paper trail in case of an audit and helps you stay organized when filing end-of-year tax forms.
Step 2: Decide on Income Tax Withholding
Although withholding federal income tax from your nanny’s paycheck is optional, it can make tax season easier for both you and your employee. If your household worker wants income tax withheld, they must complete Form W-4. This form allows them to indicate how much should be withheld from each paycheck based on their tax filing status and number of dependents.
You can determine how much to withhold using the IRS Publication 15, which provides detailed tables and examples. Some states also require income tax withholding, so check your state tax agency’s website to see whether this is required and what forms to use.
If your nanny prefers not to have income tax withheld, they may need to make quarterly estimated tax payments directly to the IRS. As their employer, you’re not responsible for ensuring they do this, but it’s important to inform them of the obligation.
Step 3: Withhold and Pay Social Security and Medicare Taxes
For most household employees, you’re required to withhold Social Security and Medicare taxes from their wages. These payroll taxes are a shared responsibility between employer and employee. Specifically:
- Withhold 6.2 percent for Social Security and 1.45 percent for Medicare from your employee’s wages
- As the employer, match these amounts by contributing an additional 6.2 percent for Social Security and 1.45 percent for Medicare
In total, 15.3 percent of your employee’s gross pay goes toward these two programs. You may choose to cover both the employee’s and your share yourself, but the IRS still expects the full tax amount to be paid.
These payments go toward your employee’s future eligibility for Social Security benefits and Medicare coverage, so withholding and remitting them properly is not only a legal requirement but also a long-term benefit for your worker.
Step 4: Determine Federal Unemployment Tax Obligations
The Federal Unemployment Tax Act (FUTA) requires household employers to pay unemployment taxes if they pay a total of $1,000 or more in cash wages to household employees during any calendar quarter of the current or previous year. FUTA taxes are not withheld from your employee’s pay; they are paid entirely by you, the employer.
Typically, FUTA tax is 6 percent of the first $7,000 in wages paid to each household employee annually. However, you may be eligible for a tax credit of up to 5.4 percent if you pay state unemployment taxes, which would reduce the effective FUTA rate to 0.6 percent.
It’s important to note that you do not owe FUTA tax on wages paid to your spouse, your child under the age of 21, or your parents.
Step 5: Register with State Agencies as a Household Employer
Many states require household employers to register for state unemployment insurance, income tax withholding, or other employer accounts. Depending on where you live, you may need to:
- Obtain a state employer identification number
- Register with the state’s Department of Revenue or Department of Labor
- File state wage reports quarterly
- Submit unemployment insurance tax payments
Some states offer online registration systems to simplify the process. Others may require paper forms or phone registration. Be sure to check your state’s website or contact their employment department to understand what’s required in your location.
Failing to register and report appropriately can result in penalties, back taxes, and interest. Starting this process early can help you stay on track with quarterly filing deadlines.
Step 6: Set Up a Payroll System
Managing payroll for a household employee doesn’t require fancy software, but it does require consistency. At a minimum, you’ll want to keep clear records for each pay period. These should include:
- Gross wages paid before deductions
- Federal and state income taxes withheld (if applicable)
- Social Security and Medicare taxes withheld
- Employer contributions to Social Security, Medicare, and FUTA
- Net pay issued to the employee
Some household employers use spreadsheets to track this information, while others rely on payroll software or service providers. Whatever method you choose, accuracy is essential. These records will be critical when you prepare Schedule H and file annual tax forms.
If you have multiple employees, it’s especially important to maintain separate records for each one. A single mistake could complicate tax filings for everyone involved.
Step 7: Make Estimated Tax Payments to the IRS
You can remit nanny taxes to the IRS in one of two ways:
- Make quarterly estimated payments using Form 1040-ES
- Increase the amount withheld from your own paycheck at your regular job to cover household employment taxes
Making quarterly payments spreads your tax liability across the year and reduces the risk of a surprise bill when you file your annual return. If you choose to adjust your own withholding instead, you’ll need to complete a new W-4 form with your employer.
Estimated tax payments can be made electronically through the IRS Direct Pay system or by mailing payment vouchers with Form 1040-ES. Whichever method you choose, be sure to submit payments by the IRS deadlines, typically in April, June, September, and January.
Step 8: File Schedule H With Your Income Tax Return
When tax season arrives, you’ll report your household employment taxes on Schedule H, which is attached to your personal income tax return (Form 1040). Schedule H covers:
- Federal income tax withheld from your employee’s wages
- Social Security and Medicare taxes owed for both employer and employee
- FUTA taxes owed, if applicable
You must also include your household employee’s wages when calculating your total taxable income, especially if you’re claiming the Child and Dependent Care Credit. Only wages paid on the books are eligible for this credit, which makes accurate reporting even more important. If you paid estimated taxes during the year, include those payments on your return to reduce your final liability. If you didn’t, you may owe additional taxes plus interest and penalties.
Step 9: Provide Year-End Tax Forms to Your Employee
By January 31 each year, you must provide Form W-2 to your household employee. This form shows the total wages paid, taxes withheld, and other necessary information for their personal tax filing.
You must also file Form W-3, which is a summary of all W-2 forms issued, and send it to the Social Security Administration. These forms can be submitted electronically through the SSA’s Business Services Online portal or by mail if you prefer paper forms.
Be sure to use the correct employer identification number and ensure all information is accurate. Errors on these forms can delay processing and result in penalties or confusion for your employee.
Step 10: Understand the Risks of Non-Compliance
Failing to follow nanny tax rules can have serious consequences. The IRS may assess penalties for failure to withhold and pay employment taxes, including interest on unpaid amounts and fines for late filings.
Your employee may also face difficulties if taxes are not paid correctly. They could lose out on Social Security credits, Medicare eligibility, or unemployment benefits. In some cases, the worker may report their employment to claim benefits, which could trigger an audit or investigation.
Additionally, under-the-table arrangements can disqualify you from claiming valuable tax credits and deductions. Paying legally protects you and your employee while providing peace of mind.
Common Mistakes to Avoid
Several errors commonly occur when new household employers try to handle nanny taxes. Avoiding these can help you stay compliant and reduce stress:
- Assuming that paying in cash eliminates the need to report wages
- Misclassifying your nanny as an independent contractor
- Failing to register with state agencies
- Forgetting to issue W-2 and W-3 forms by the deadline
- Not keeping accurate records of wages, taxes, and hours
- Ignoring estimated tax payment deadlines
Taking time to set up a proper payroll process early on will save you time and trouble down the road. Being proactive reduces the risk of penalties and simplifies year-end reporting.
Planning for Multiple Household Employees
If you employ more than one worker in your household, such as a nanny and a housekeeper, the same rules apply. You must track wages for each employee separately, issue individual tax forms, and include them all on Schedule H.
The $1,000-per-quarter threshold for FUTA tax applies to total wages paid to all household employees. However, Social Security and Medicare taxes are calculated separately for each worker based on their individual earnings.
Organized recordkeeping is especially important when managing multiple employees. Set up separate folders, spreadsheets, or payroll accounts for each worker to avoid mixing up information or overreporting wages.
Importance of Ongoing Compliance
Becoming a household employer comes with more than just a one-time filing responsibility. Once you hire a nanny and meet the threshold for tax obligations, you must maintain year-round compliance to avoid penalties, interest, or legal issues. Staying organized and proactive ensures your household operates within the law and provides a fair, transparent working relationship for your employee.
Unlike traditional employment situations where companies have payroll departments and HR professionals to manage tax withholdings and filings, household employers often shoulder these responsibilities alone. Understanding your quarterly, annual, and recordkeeping duties helps you avoid common mistakes and gives your nanny the benefits of lawful employment.
Creating a Payment and Recordkeeping System
The foundation of good nanny tax compliance is a reliable payroll and documentation process. It starts with setting up a clear system to track:
- Hours worked
- Gross wages
- Withheld taxes (Social Security, Medicare, income tax if applicable)
- Employer contributions (Social Security, Medicare, unemployment insurance)
Use a digital payroll service or a spreadsheet to log each payment and deduction. Include dates, hours worked, and any overtime pay. Maintaining a weekly or biweekly schedule makes it easier to complete end-of-quarter or end-of-year tax filings and provides your employee with a predictable income structure.
Some employers choose to use household payroll software or third-party services to automate the calculations, pay stubs, and tax deposits. If you opt to do it yourself, staying disciplined is essential to ensure no payments or filings are missed.
Issuing Regular Pay Stubs
While federal law does not mandate pay stubs, many states require employers to provide one with each payment. A pay stub serves as proof of wages and withholdings and helps the nanny track income for their own tax records.
Each pay stub should include:
- Pay period start and end dates
- Hours worked
- Gross pay
- Tax withholdings
- Net pay received
Keeping copies of these documents in both physical and digital formats ensures you can provide proof of payment if needed for audits, disputes, or government inquiries.
Calculating Overtime for Household Employees
One of the most commonly overlooked obligations in household employment is paying overtime. Under the Fair Labor Standards Act (FLSA), nannies who live outside the employer’s home are generally entitled to overtime pay for any hours worked over 40 in a week. This overtime rate must be at least 1.5 times the regular hourly wage.
For example, if your nanny earns $20 per hour and works 45 hours in a week, the five overtime hours must be paid at $30 per hour. Total weekly pay would be:
- 40 hours at $20/hour = $800
- 5 overtime hours at $30/hour = $150
- Total = $950
Live-in nannies are treated differently under federal law and are not automatically entitled to overtime, although some states have rules that require it. Always check with your state labor department to confirm the applicable regulations.
Managing State and Federal Unemployment Insurance
Household employers are typically required to pay federal unemployment taxes (FUTA) if they pay at least $1,000 in wages in any calendar quarter. FUTA taxes are paid entirely by the employer and are not deducted from the nanny’s paycheck.
The current FUTA tax rate is 6.0 percent on the first $7,000 of wages, but most employers receive a credit of 5.4 percent if they also pay into a state unemployment system. This lowers the effective federal rate to 0.6 percent.
In addition to FUTA, almost every state has its own unemployment insurance program. You must register with your state’s labor department and submit contributions according to state guidelines. These payments help ensure that your employee may be eligible for unemployment benefits if they are let go or if your arrangement ends.
Filing Schedule H with Your Personal Tax Return
When it comes time to file your individual federal income tax return, you must also complete Schedule H to report household employment taxes. This form calculates the total taxes you owe for:
- Social Security and Medicare contributions
- Federal unemployment taxes
- Any withheld income taxes
You attach Schedule H to your Form 1040. Even if you used estimated tax payments or increased your own withholding to cover household taxes throughout the year, you are still required to complete and file Schedule H. Failure to file Schedule H can lead to IRS notices, penalties, and interest on unpaid amounts. It’s a crucial step in properly documenting your role as a household employer.
Annual Form W-2 and W-3 Filing Responsibilities
At the end of the year, you must issue a Form W-2 to your nanny no later than January 31. This form summarizes all wages paid and taxes withheld during the prior calendar year. In addition to giving your employee a copy, you must also file:
- Copy A of Form W-2 with the Social Security Administration
- Form W-3, which is a transmittal form summarizing your W-2 data
These forms must be submitted by January 31 to avoid late penalties. You can file them electronically through the Social Security Administration’s Business Services Online portal. Filing early ensures your nanny has time to use the W-2 for their personal tax return and that all government reporting requirements are met.
How to Handle Reimbursements and Non-Wage Payments
Sometimes household employers reimburse their nanny for job-related expenses such as public transportation, supplies, or mileage. These reimbursements are not subject to employment taxes if properly documented and made under an accountable plan.
An accountable plan must meet three conditions:
- The expense has a business connection
- The employee provides receipts or substantiation
- The employee returns excess amounts
If reimbursements don’t meet these conditions, they may be considered taxable income and should be included on the nanny’s W-2. Similarly, non-wage compensation such as gifts or bonuses may be taxable, depending on the amount and nature of the gift. Holiday bonuses or performance-based rewards are generally treated as wages and should be reported accordingly.
Navigating Benefits for Your Nanny
While not legally required, some household employers choose to offer additional benefits to their nannies, such as paid time off, health insurance stipends, or contributions to a retirement plan. Offering benefits can improve employee satisfaction and reduce turnover.
If you contribute to health insurance, these payments are generally not subject to employment taxes if made under a qualifying plan. Retirement contributions may also be tax-advantaged if properly structured, though they can add complexity to your payroll setup. Documenting all benefits in a written work agreement or contract helps avoid confusion and ensures both parties understand what is being offered and how it will be managed.
Ending the Employment Relationship Responsibly
When your need for a nanny ends—whether due to children aging out of care, relocating, or changing schedules—it’s important to end the employment relationship properly. This includes:
- Providing written notice of termination
- Paying all final wages, including unused vacation time if applicable
- Delivering a final pay stub with wage and tax details
- Providing a final W-2 at the appropriate time
In some states, you may also need to provide a separation notice or other documentation required by unemployment agencies. Keeping your records up to date and informing your state unemployment office helps the transition go smoothly and protects your former employee’s rights.
Handling a Nanny Who Quits Mid-Year
If your nanny leaves before the end of the year, either voluntarily or involuntarily, you are still responsible for issuing a W-2 by January 31 for any wages paid during the calendar year. Keep accurate records through their last day of work and calculate taxes based on their final paycheck.
You must also ensure that any unpaid taxes are submitted on time, whether through estimated payments or on your personal return via Schedule H. Regardless of how the employment ends, your filing obligations remain the same.
Hiring a Replacement Nanny or Multiple Employees
If you hire a new nanny after your previous one departs, your household employment responsibilities continue without interruption. You must:
- Collect new forms (W-4, I-9, etc.)
- Begin a new pay and tax withholding schedule
- Track each employee separately
If you employ multiple nannies or other household staff, you must manage payroll and taxes for each one individually. Your total unemployment insurance contributions and employment tax filings will reflect combined payroll totals, but individual W-2s are still required. Having a centralized system for managing multiple workers, such as dedicated payroll software or a spreadsheet tracker, helps reduce errors and simplifies year-end filing.
Understanding Audit Risks and How to Prepare
The IRS may conduct audits of household employers, especially when large cash withdrawals or missing wage reporting are flagged. To minimize your risk and ensure you are prepared if contacted:
- Maintain complete and organized records
- File all required forms on time
- Keep digital backups of key documents
- Respond to any IRS notices promptly and accurately
Being proactive and transparent in your employment practices not only keeps you compliant but also strengthens your working relationship with your nanny. An audit is less stressful when you can quickly produce documentation and demonstrate that you’ve followed all necessary procedures.
What to Do If You Missed Past Nanny Taxes
If you previously hired a nanny but failed to withhold or pay employment taxes, you still have options. The IRS allows you to voluntarily correct past mistakes by filing amended returns and paying any owed taxes and penalties.
Start by gathering all wage and payment information. You’ll need to:
- Prepare and file late W-2s and W-3s
- Submit Schedule H for each affected year
- Pay back taxes, interest, and applicable penalties
Voluntarily coming forward often leads to more favorable outcomes than being caught through an audit or employee claim. Consulting with a tax professional may be helpful in navigating complex corrections.
Conclusion
Hiring a nanny or household employee brings more than just the comfort of trusted care, it also comes with important legal responsibilities. One of the most overlooked yet critical aspects of household employment is staying compliant with tax regulations. Failing to report wages properly or neglecting tax obligations can lead to unexpected financial penalties and legal trouble.
Understanding when and why nanny tax rules apply is essential for anyone hiring in-home help. From determining whether your caregiver qualifies as a household employee to collecting the right documentation and filing the necessary forms, each step helps you stay on the right side of the law. It also ensures that your employee receives the proper benefits and protections, including Social Security, Medicare, and unemployment insurance.
Properly managing household employment taxes may feel overwhelming at first, but with consistent recordkeeping, timely payments, and awareness of federal and state rules, it becomes a manageable task. Taking care of these details doesn’t just fulfill your obligations, it also reinforces the trust and transparency between you and your caregiver. That strong foundation can lead to a more professional, long-term working relationship.
In the end, treating your household employee fairly and responsibly by adhering to tax laws supports both financial integrity and peace of mind. Whether you manage the process yourself or seek help from a tax professional, being proactive about nanny taxes is a smart move for any household employer.