If you pay a household worker $3,000 or more in cash wages during 2026, the nanny tax kicks in: you owe Social Security and Medicare taxes on those wages, and a separate $1,000-per-quarter trigger brings federal unemployment tax into the picture.1Internal Revenue Service. Topic No. 756, Employment Taxes for Household Employees Add state obligations, year-end W-2s, and wage-and-hour rules, and you’re a household employer. The setup is less work than most families expect. Skipping it is where the real cost lives.
Your Nanny Is an Employee
The IRS test is simple. If you control what work gets done and how, the person doing it is your employee, not a contractor.1Internal Revenue Service. Topic No. 756, Employment Taxes for Household Employees A nanny almost always fits: you set the hours, provide the home as workspace, decide how the children are cared for, and supply what the job requires. Part-time work doesn’t change the answer. Neither does finding the nanny through a referral agency.
Calling a nanny an independent contractor to avoid payroll taxes invites the IRS to reclassify the relationship later. When that happens, you owe the back taxes, both halves of FICA that were never withheld, plus interest and penalties running from the first paycheck. A house-cleaning company that rotates staff is a different situation. The nanny who arrives at 8 a.m. every weekday is not.
What You Actually Owe
Social Security and Medicare
Cross $3,000 in cash wages to one household employee in 2026 and Social Security and Medicare taxes apply to every dollar you paid that person.2Internal Revenue Service. Publication 926, Household Employer’s Tax Guide The combined FICA rate is 15.3% of gross wages, split evenly: 6.2% Social Security and 1.45% Medicare from you, matched by 7.65% from your employee. You can withhold the employee’s share from each paycheck or pay it yourself as a benefit.1Internal Revenue Service. Topic No. 756, Employment Taxes for Household Employees The employer half is always yours.
The threshold is per employee, per year. If you also pay a weekend cleaner $1,500, FICA doesn’t attach to those wages. The dollar figure adjusts annually, so check it each January.3Social Security Administration. Employment Coverage Thresholds
Federal Unemployment Tax
A different trigger governs FUTA. If you pay $1,000 or more in total cash wages to household employees in any calendar quarter, you owe FUTA on the first $7,000 of each employee’s annual wages.4Office of the Law Revision Counsel. 26 U.S. Code 3306 – Definitions The statutory rate is 6%, but employers who pay their state unemployment tax on time get a credit of up to 5.4%, cutting the effective federal rate to 0.6%.5Office of the Law Revision Counsel. 26 USC 3302 – Credits Against Tax On $7,000 in wages, that’s $42 per employee. FUTA is entirely your cost. You don’t withhold it.
Federal Income Tax Withholding Is Optional
You don’t have to withhold federal income tax from your nanny’s pay. If your nanny asks you to and you agree, have them fill out a Form W-4.2Internal Revenue Service. Publication 926, Household Employer’s Tax Guide Many families do withhold, because it spares the nanny a lump-sum bill in April. Otherwise your nanny handles quarterly estimated payments on their own.
Setup: An Afternoon of Paperwork
Employer Identification Number
Apply for a federal EIN online at IRS.gov/EIN and you’ll get the number immediately.6Internal Revenue Service. Instructions for Form SS-4 Paper Form SS-4 also works but takes longer.7Internal Revenue Service. About Form SS-4, Application for Employer Identification Number Having an EIN doesn’t turn your household into a business. It just identifies you for payroll tax purposes.
Form I-9
Federal law requires you to verify your nanny’s identity and work authorization on Form I-9. Section 1 is completed by your employee no later than the first day of work; you complete Section 2 within three business days after that first day.8U.S. Citizenship and Immigration Services. Instructions for Form I-9, Employment Eligibility Verification Your nanny picks which documents to show, from a passport alone to a combination like a driver’s license and a Social Security card. You review originals and record the details. You can’t demand specific documents or refuse valid ones.9U.S. Citizenship and Immigration Services. Completing Section 2, Employer Review and Attestation Keep the completed I-9 on file.
Social Security Number and W-4
You need your nanny’s Social Security number to report wages accurately at year-end.10Social Security Administration. Employer W-2 Filing Instructions and Information If you’re withholding federal income tax, have your nanny complete a Form W-4 to set the amount.11Internal Revenue Service. About Form W-4, Employee’s Withholding Certificate
Keep a Payment Log
Track every payment: date, gross wages, and anything withheld. A spreadsheet is enough. This record feeds your year-end filings and protects you if anything gets questioned. Household payroll services will handle it for a monthly fee, which many families find worth the cost.
Minimum Wage and Overtime
Wage-and-hour law applies to domestic workers, and this is where families who otherwise do everything right sometimes trip.
Your nanny must earn at least the federal minimum wage for every hour worked, and many states set a higher floor. A live-out nanny who doesn’t reside in your home gets overtime at 1.5 times the regular rate for any hours over 40 in a workweek. Live-in domestic workers who reside in the household are exempt from the federal overtime requirement, though minimum wage still applies to all hours worked.12Office of the Law Revision Counsel. 29 USC 213 – Exemptions Some states remove that live-in exemption, so the federal rule is a floor.
Paying a flat weekly salary without tracking hours is the common mistake. If your live-out nanny works 50 hours some weeks, those extra 10 hours are overtime. Track hours from day one, even when the schedule looks predictable.
Filing and Paying the Tax
Schedule H
Household employment taxes don’t get their own return. You report FICA, any income tax you withheld, and FUTA on Schedule H, attached to your Form 1040.13Internal Revenue Service. Instructions for Schedule H The total flows onto your personal return.
Pay As You Go
Because these taxes accumulate all year, paying the full amount in April can trigger an underpayment penalty. Two ways to avoid it: increase the federal income tax withheld from your own paycheck by adjusting your W-4 at your job, or make quarterly estimated payments using Form 1040-ES.13Internal Revenue Service. Instructions for Schedule H Bumping up your own withholding is usually the simpler route. Set it once, forget it.
Year-End W-2 and W-3
By January 31 following the tax year, give your nanny a completed Form W-2 showing total wages and any taxes withheld.2Internal Revenue Service. Publication 926, Household Employer’s Tax Guide Send Copy A of the W-2 along with a transmittal Form W-3 to the Social Security Administration by the same deadline.14Social Security Administration. Deadline Dates to File W-2s The SSA takes electronic filings through its Business Services Online portal. These filings credit your nanny’s earnings toward future Social Security benefits, so skipping them shortchanges your employee as well as creating a problem for you.
State Obligations
Federal taxes are only part of the picture. Every state has its own rules for household employers, and missing them is one of the more common oversights.
Almost every state requires household employers to register and pay into the state unemployment insurance system. Trigger thresholds and tax rates vary. Starting rates for new employers typically range from under 1% to over 6% of wages. You register with your state’s workforce agency, which assigns your rate and sends quarterly filing instructions. Some states use the same $1,000-per-quarter FUTA trigger; some set their own.
Most states with an income tax expect household employers to withhold state tax from employee wages or at least offer the option. Rules mirror the federal approach. Your nanny may request withholding, and in some states it’s mandatory above a certain wage level. Check with your state tax agency; registration and filing are separate from the federal system.
About half the states require household employers to carry workers’ compensation insurance, which covers medical bills and lost wages if your nanny is hurt on the job. Some require it for all household employees; some only above a weekly hours threshold. Even where it’s optional, a policy protects you from personal liability for an injury in your home. Coverage for a single domestic worker is often a few hundred dollars a year.
What Happens If You Skip It
The IRS treats household employment taxes like any other tax. If you file your return late, the failure-to-file penalty is 5% of the unpaid tax per month, up to 25%.15Internal Revenue Service. Failure to File Penalty A separate failure-to-pay penalty layers on top, and interest runs on the full balance from the original due date.
If you never filed Schedule H and the IRS catches up, often because a nanny filed a return without a matching W-2, you owe all the back taxes (the employer share and the employee share you never withheld), plus penalties and interest. Missing the January 31 W-2 deadline carries its own penalties.13Internal Revenue Service. Instructions for Schedule H Form I-9 violations sit outside the tax system entirely, enforced by Immigration and Customs Enforcement with their own civil fines. A couple of years of ignoring these obligations can easily reach several thousand dollars in penalties alone, well above what the taxes themselves would have cost.
Two Ways to Get Some of It Back
Child and Dependent Care Tax Credit
If you paid someone to care for a child under 13, or a dependent unable to care for themselves, so you and your spouse could work or look for work, you can claim the Child and Dependent Care Tax Credit on Form 2441.16Internal Revenue Service. About Form 2441, Child and Dependent Care Expenses The credit applies to up to $3,000 in expenses for one qualifying person, or $6,000 for two or more. The percentage of those expenses you actually get back depends on your adjusted gross income, with lower-income families getting a higher percentage. Changes enacted by the One Big, Beautiful Bill Act in 2025 raised the credit rate for many moderate-income households.17Internal Revenue Service. One, Big, Beautiful Bill Provisions Both spouses need earned income to qualify, and eligible expenses can’t exceed the lower-earning spouse’s wages.
Dependent Care FSA
If your employer offers a Dependent Care FSA, you can set aside pre-tax dollars for childcare. For 2026, the annual limit is $7,500 for married couples filing jointly or single filers, and $3,750 if married filing separately.18FSAFEDS. Dependent Care FSA Because the money goes in before income and payroll taxes, a family in the 22% bracket contributing $7,500 typically cuts their total tax bill by roughly $2,200 or more, depending on state taxes.
You can use both the FSA and the credit in the same year, but expenses run through the FSA reduce the expenses eligible for the credit dollar-for-dollar. For most families with FSA access, maxing the FSA first and claiming the credit on any remaining expenses works out best. Run the numbers both ways before you commit; the right answer depends on your income and how much you spend on care.