If you employ a nanny, two federal tax breaks do most of the work: a Dependent Care Flexible Spending Account through your employer and the Child and Dependent Care Tax Credit on your return. Between them, nanny tax credits and deductions can knock hundreds to a few thousand dollars off what your family pays each year. You have to pay your household employment taxes correctly to claim either one.
The Dependent Care FSA: Usually the Bigger Saver
If your employer offers a Dependent Care FSA, this is almost always the first benefit to use. For 2026, you can set aside up to $7,500 pre-tax if you are single or married filing jointly, and $3,750 if you are married filing separately.1Office of the Law Revision Counsel. 26 USC 129 – Dependent Care Assistance Programs The limit rose from $5,000 starting in 2026, so if you set your election in a prior year, revisit it.
Money you route through the FSA avoids federal income tax, Social Security tax, and Medicare tax. A family in the 22% bracket saves roughly 30% on every dollar contributed once payroll taxes are counted. On a full $7,500 contribution, that is around $2,250. The higher your bracket, the more the FSA outruns the credit.
You elect the amount during your employer’s open enrollment (or within 30 days of a qualifying life event), and the funds come out of your paycheck in equal installments across the year. You submit nanny wage receipts for reimbursement.
The Child and Dependent Care Tax Credit
The credit reduces your federal income tax based on what you spend on care so you (and your spouse, if you file jointly) can work or look for work. The qualifying person is generally a dependent child under 13, or a spouse or dependent who cannot physically or mentally care for themselves.2Office of the Law Revision Counsel. 26 USC 21 – Expenses for Household and Dependent Care Services Necessary for Gainful Employment
You can count up to $3,000 in expenses for one qualifying person or $6,000 for two or more. The credit is a percentage of those expenses, sliding from 35% at adjusted gross incomes of $15,000 or less down to 20% once household income passes $43,000. Most families paying a nanny land at the 20% rate, which produces a credit of $600 for one child or $1,200 for two.3Internal Revenue Service. Form 2441 – Child and Dependent Care Expenses
Two rules catch people. Both spouses on a joint return need earned income during the year; if one spouse doesn’t work and isn’t a full-time student or disabled, the credit is off the table.4Internal Revenue Service. Child and Dependent Care Credit FAQs And the credit is non-refundable: it can wipe out your tax, but the excess doesn’t come back as a refund. You claim it on Form 2441 and must include your nanny’s name, address, and taxpayer identification number.
How the FSA and the Credit Interact
You cannot double-count the same dollar. Every dollar you run through your Dependent Care FSA reduces the expenses you can apply to the credit, and FSA contributions count against the credit’s $3,000/$6,000 caps first. Put $7,500 through the FSA and the credit drops to zero, because you have already exceeded the $6,000 ceiling. For one child, where the credit ceiling is only $3,000, a modest FSA contribution can eliminate the credit entirely.3Internal Revenue Service. Form 2441 – Child and Dependent Care Expenses
You can still combine them in the right circumstances. With two children and $10,000 in nanny wages, you could route $5,000 through the FSA and apply another $1,000 toward the credit, staying under the $6,000 aggregate. The right split depends on your bracket and total spending, so model both before your employer’s FSA enrollment closes.
Which One to Use
For most households earning enough to hire a nanny, the FSA wins. At the 20% credit rate, $6,000 in expenses for two children yields $1,200. Running $7,500 through the FSA saves at least $1,650 in federal income tax alone at the 22% bracket, plus payroll tax savings on top.
The credit is the better tool when you don’t have access to an FSA through your employer, or when your income is low enough to qualify for the higher credit percentages. At the 35% rate with two children, the credit is worth $2,100 with no employer plan needed.
The Payroll Taxes You Owe First
You can’t claim either benefit cleanly without treating your nanny as what the IRS says they are: your employee. Classification turns on control, not on hours or how you found the person. If you decide what work happens and how, the nanny is an employee, whether full time, part time, or hired through an agency.5Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
Once you pay $3,000 or more in cash wages during 2026, you owe Social Security tax at 6.2% and Medicare tax at 1.45% on those wages. Your nanny owes the same percentages. You can withhold the employee share from each paycheck or cover it yourself; if you cover it, the amount counts as additional wages for income tax purposes. The threshold moves periodically, so confirm the current figure each January.6Social Security Administration. Employment Coverage Thresholds
Federal unemployment tax applies separately if you pay $1,000 or more in any single calendar quarter. FUTA runs on the first $7,000 of wages, and paying your state unemployment tax on time drops the effective federal rate substantially.7Employment & Training Administration. Unemployment Insurance Tax Topic Most states require household employers to register for state unemployment insurance separately, so contact your state labor department.
Misclassifying a nanny as an independent contractor is expensive. The IRS can pursue back taxes plus interest and a failure-to-pay penalty.8Internal Revenue Service. Failure to Pay Penalty
Don’t Get Hit With an Underpayment Penalty
Household employers don’t make separate quarterly payroll deposits. The taxes you owe on your nanny’s wages get added to your personal return through Schedule H at year end. If you haven’t paid enough through the year, the IRS charges an underpayment penalty.9Internal Revenue Service. About Schedule H (Form 1040), Household Employment Taxes
The easiest fix is to file a new Form W-4 at your own job and increase the extra federal income tax withheld from each paycheck by enough to cover the expected household employment taxes. Otherwise, make quarterly estimated payments on Form 1040-ES.10Internal Revenue Service. Pay As You Go, So You Won’t Owe: A Guide to Withholding, Estimated Taxes, and Ways to Avoid the Estimated Tax Penalty
You avoid the penalty if you owe less than $1,000 at filing, pay at least 90% of the current year’s tax through withholding and estimates, or pay at least 100% of last year’s tax liability. That last figure jumps to 110% if your prior-year adjusted gross income was above $150,000.
Paperwork You Need Before the First Paycheck
Get a federal Employer Identification Number before you run payroll. You cannot use your own Social Security number on Schedule H. Apply online at IRS.gov/EIN for an instant number, or submit Form SS-4 by fax or mail.5Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
Have your nanny complete Form W-4. Withholding federal income tax is optional for household employers, but your nanny may ask you to do it. Collect their Social Security number or ITIN for the year-end W-2.
Federal law also requires you to verify identity and work authorization on Form I-9. The exemption for household workers is narrow and covers only sporadic or irregular domestic work, so a full-time nanny is not exempt.11U.S. Citizenship and Immigration Services. Handbook for Employers M-274 – 2.0 Who Must Complete Form I-9
Filing at Year End
Household employment taxes go on Schedule H, attached to your Form 1040. Schedule H tallies Social Security, Medicare, any withheld income tax, and FUTA.12Internal Revenue Service. Schedule H (Form 1040) 2025 – Household Employment Taxes Claim the Child and Dependent Care Tax Credit on Form 2441 with the same return.
By January 31 of the following year, give your nanny a completed Form W-2 and file Copy A with the Social Security Administration.13Social Security Administration. Deadline Dates to File W-2s Missing the W-2 deadline triggers its own penalties, separate from anything on your 1040.
Keeping the Records
Hold on to wage logs, W-2 copies, Schedule H, Form 2441, and your nanny’s taxpayer identification information for at least four years after the return’s due date or the date the tax was paid, whichever is later.14Internal Revenue Service. Employment Tax Recordkeeping Form I-9 runs on a different clock: keep it for three years from the hire date or one year after employment ends, whichever is later.15U.S. Citizenship and Immigration Services. I-9, Employment Eligibility Verification