To pay a nanny legally, you treat them as your household employee: get a federal Employer Identification Number, verify their work eligibility, withhold Social Security and Medicare taxes from each paycheck, pay your matching share plus federal unemployment tax, follow federal and state wage-and-hour laws, and file a W-2 and Schedule H at year-end. For 2026, Social Security and Medicare taxes apply once you pay a household employee $3,000 or more in cash wages during the year.1Social Security Administration. Employment Coverage Thresholds It is more paperwork than most parents expect, but each step is straightforward once you know the order.
Your Nanny Is an Employee, Not a Contractor
The IRS treats household workers as employees whenever you control not just what work gets done but how it gets done. If you set the schedule, decide which tasks the nanny handles, and provide the supplies, that person is your employee. It doesn’t matter whether the job is full-time or part-time, or whether you found the nanny through an agency.2Internal Revenue Service. Hiring Household Employees
Classifying a nanny as an independent contractor to skip payroll obligations is one of the more expensive mistakes a household employer can make. If the IRS reclassifies the worker later, you owe all the back taxes, plus penalties and interest. Get the classification right from day one.
Set Up Before the First Day of Work
Get an Employer Identification Number
You need an EIN from the IRS before you can file employment taxes or issue a W-2. The fastest route is applying online through the IRS website, which generates the number immediately. You can also fax or mail Form SS-4, though those methods take days to weeks.3Internal Revenue Service. About Form SS-4, Application for Employer Identification Number (EIN)
Complete Form I-9
You also need to verify your nanny’s identity and legal right to work in the United States using Form I-9. This requirement applies to any domestic worker performing regular, ongoing services. The exemption for “casual domestic employment” covers only sporadic or intermittent workers, not a nanny you employ on a set schedule.4U.S. Citizenship and Immigration Services. Domestic Workers
Your nanny fills out Section 1 of the form no later than the first day of work. You then review their identity and work-authorization documents and complete Section 2 within three business days of that first day.5U.S. Citizenship and Immigration Services. Instructions for Form I-9, Employment Eligibility Verification You can’t tell the nanny which specific documents to present. Keep the form on file for as long as the nanny works for you, then retain it for either three years after the hire date or one year after employment ends, whichever is later.
Taxes You Owe on Nanny Wages
Social Security and Medicare (FICA)
If you pay a household employee $3,000 or more in cash wages during 2026, both you and your nanny owe Social Security and Medicare taxes on those wages. The Social Security rate is 6.2% each, and the Medicare rate is 1.45% each, for a combined 7.65% withheld from the employee and 7.65% paid by you on top.6Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
Social Security tax applies only to the first $184,500 in wages for 2026.7Social Security Administration. Contribution and Benefit Base Medicare tax has no cap, and you must withhold an additional 0.9% Medicare tax on any wages exceeding $200,000 in a calendar year.6Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
Federal Unemployment Tax (FUTA)
If you pay $1,000 or more in total cash wages to household employees in any calendar quarter of 2025 or 2026, you owe federal unemployment tax on the first $7,000 you pay each employee during the year.8Office of the Law Revision Counsel. 26 USC 3306 – Definitions The FUTA rate is 6%, but employers who pay state unemployment taxes on time get a credit of up to 5.4%, bringing the effective federal rate down to 0.6%.9Internal Revenue Service. Topic No. 759, Form 940 – Employers Annual Federal Unemployment (FUTA) Tax Return FUTA is entirely your cost. Nothing comes out of the nanny’s pay.
Federal Income Tax Withholding Is Optional
You are not required to withhold federal income tax from your nanny’s wages. If your nanny asks you to withhold and you agree, have them complete a Form W-4 so you can calculate the correct amount.10Internal Revenue Service. Topic No. 756, Employment Taxes for Household Employees Many nannies prefer withholding to avoid a large tax bill in April. If your nanny doesn’t request it, they’re responsible for their own estimated tax payments.
State Taxes
Most states impose their own unemployment insurance tax on household employers. Wage bases and rates vary widely, and some states also require state income tax withholding or contributions to disability or paid family leave programs. Check with your state’s labor or revenue department, because a missed state obligation generates penalties independently of anything at the federal level.
Wage and Hour Rules You Have to Follow
The Fair Labor Standards Act covers nannies. Your nanny must earn at least the federal minimum wage of $7.25 per hour for every hour worked, and if your state or city sets a higher minimum, the higher rate controls.11U.S. Department of Labor. Fact Sheet 79D – Hours Worked Applicable to Domestic Service Employment Under the Fair Labor Standards Act Market rates run well above the federal floor almost everywhere, but the legal minimum still matters because overtime is calculated from the regular hourly rate.
For any workweek over 40 hours, you owe overtime at one and one-half times the regular hourly rate.12U.S. Department of Labor. Fact Sheet 79B – Live-in Domestic Service Workers Under the Fair Labor Standards Act The main federal exception covers live-in nannies: if your nanny resides in your household, federal law exempts them from overtime, though minimum wage still applies to all hours worked.13Office of the Law Revision Counsel. 29 USC 213 – Exemptions Some states override that exemption, so don’t assume the federal rule is the last word.
Keep daily records of hours worked. Track start times, end times, and break periods. This protects you in any wage dispute and is necessary for correct overtime math.
Running Payroll Each Pay Period
Each pay period, calculate gross wages based on hours worked (or the agreed salary equivalent), subtract the employee’s share of FICA and any voluntary income tax withholding, and pay the net amount. You can pay by check, direct deposit, or cash, though a paper trail makes everything else easier.
Many families use a payroll service built for household employment. These services handle the math, generate pay stubs, make tax deposits, and file year-end forms. The cost typically runs $50 to $75 per month. If you prefer to manage payroll yourself, software designed for household employers walks you through each step.
Year-End Filings and Deadlines
Two filings close out the year. First, give your nanny a Form W-2 showing total wages and all taxes withheld. The deadline to deliver this is January 31 following the tax year.14Social Security Administration. Deadline Dates to File W-2s For the 2026 tax year, you must also transmit copies of the W-2 and Form W-3 to the Social Security Administration by February 1, 2027.6Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
Second, file Schedule H with your personal Form 1040. This is where you report all household employment taxes for the year: FICA, FUTA, and any federal income tax you withheld. Schedule H is due with your tax return by April 15, 2027 for the 2026 tax year. An extension on your 1040 covers Schedule H too.6Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
Household employers typically cover their liability through quarterly estimated tax payments or by increasing withholding at their own job. Estimated tax payments for 2026 are due April 15, June 15, and September 15, 2026, and January 15, 2027.6Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide Waiting until April to pay everything at once can trigger an underpayment penalty.
Hold on to all employment tax records for at least four years after the tax is due or paid, whichever is later.15Internal Revenue Service. Recordkeeping That means copies of Schedule H, W-2 forms, payroll records, hours worked, and the nanny’s W-4 if you withheld income tax.
Workers’ Compensation and State-Specific Rules
More than 20 states require household employers to carry workers’ compensation insurance for domestic employees, with eligibility thresholds that vary by state. Some trigger coverage based on hours per week, others on quarterly earnings. Even where coverage is optional, carrying a policy protects you from personal liability if your nanny is injured on the job. A basic household workers’ comp policy typically costs a few hundred dollars per year.
A growing number of states have also enacted domestic worker protections that go beyond federal law, covering areas like mandatory rest breaks, paid sick leave, and protection from harassment. Scope varies, so check your state’s labor department for the rules that apply to you.
Tax Breaks That Offset Your Costs
Putting your nanny on the books unlocks two federal tax benefits. Paying under the table forfeits both.
If your employer offers a dependent care flexible spending account, you can set aside up to $7,500 per household in pre-tax dollars for childcare expenses in 2026. For married individuals filing separately, the limit is $3,750.16Office of the Law Revision Counsel. 26 USC 129 – Dependent Care Assistance Programs Because this money is excluded from taxable income, actual savings depend on your marginal rate. A family in the 24% federal bracket saves roughly $1,800 in federal income tax alone, plus FICA savings. This is often the single largest financial reason to pay legally.
If you don’t use a dependent care FSA, or if your childcare expenses exceed what the FSA covers, you may qualify for the Child and Dependent Care Tax Credit. The credit applies to up to $3,000 in qualifying expenses for one child or $6,000 for two or more children, at a credit percentage of 20% to 35% depending on your adjusted gross income. Expenses already excluded through an FSA reduce the dollar limits available for this credit, so most families benefit from one or the other rather than both.
Penalties for Getting It Wrong
The IRS charges a penalty of 0.5% of unpaid taxes for each month (or partial month) they remain unpaid, up to a maximum of 25%.17Internal Revenue Service. Failure to Pay Penalty Interest accrues on top of that from the original due date. Failure to file Schedule H carries its own separate penalty, and late or missing W-2 forms add per-form fines. Your state can pursue you independently for unpaid unemployment insurance contributions.
The financial penalties are only part of the picture. Background checks for security clearances and professional licenses sometimes surface unpaid nanny taxes years later. Paying legally from the start costs more upfront and removes a risk that tends to show up at the worst possible moment.