A nanny should almost always be paid as a W-2 employee, not a 1099 independent contractor. The IRS lists nannies by name as household employees, and families who set the schedule, choose the activities, and provide the home and supplies meet every common-law test of an employer. Issuing a 1099 to a nanny does not change what the arrangement actually is; it just creates tax exposure for the family and strips the nanny of protections they are entitled to.
Why the IRS Treats Nannies as Employees
The IRS applies three common-law tests to decide whether a worker is an employee or an independent contractor. Nannies fail the contractor side of all three.
Behavioral control. You decide when the nanny arrives, what the children eat, which activities fill the day, and how discipline is handled. Any level of direction over how the work gets done points toward employment.
Financial control. You supply the home, the food, the car seats, the toys, and often the vehicle. The nanny takes no financial risk, invests in no equipment of their own, and cannot earn a profit or suffer a loss based on business decisions.
Nature of the relationship. The work is ongoing rather than project-based, and the nanny usually works for your family alone rather than marketing services to a roster of clients.
A real independent contractor runs their own business, serves multiple customers, sets their own methods, and brings their own tools. A self-employed house cleaner who services a dozen homes with their own supplies can fit that description. A caregiver who shows up at your house five days a week on your schedule does not.
If you genuinely cannot tell which category applies, either you or the worker can file IRS Form SS-8 and ask the IRS to decide.
What You Owe When You Classify Your Nanny Correctly
Once you pay a household employee $3,000 or more in cash wages during 2026, federal employment taxes apply. The threshold shifts periodically, so verify the current figure in Publication 926 each January. Below $3,000 you have no federal FICA obligation, though state rules can still reach you.
Social Security and Medicare
The combined FICA rate is 15.3% of cash wages, split evenly: 7.65% withheld from the nanny’s paycheck and 7.65% paid by you as the employer. The employee share breaks down to 6.2% Social Security and 1.45% Medicare. For 2026, Social Security tax applies only to the first $184,500 in wages; Medicare has no cap. Pay more than $200,000 in a year and you must also withhold an additional 0.9% Medicare tax on the excess.
Federal Unemployment Tax
If you pay $1,000 or more in total cash wages to household employees in any calendar quarter of 2025 or 2026, FUTA applies. The headline rate is 6% on the first $7,000 of each employee’s wages, but a credit of up to 5.4% drops the effective rate to 0.6% for most employers. That caps out around $42 per employee per year.
State Taxes
Most states charge their own unemployment insurance on household employers, with taxable wage bases running from roughly $7,000 to over $50,000. Some states also require disability insurance withholding, paid family leave contributions, or state income tax withholding. Your state labor and revenue agencies are the authority for what applies where you live.
Wage and Hour Rules
Nannies are domestic service workers covered by the Fair Labor Standards Act. You owe at least the federal minimum wage for every hour worked and time-and-a-half for hours over 40 in a workweek, or your state’s higher minimum if there is one. Live-in nannies are exempt from federal overtime but still must receive minimum wage for all hours; some states override that exemption and require overtime anyway.
How to Run Nanny Payroll
Household employers do not file quarterly payroll returns the way businesses do. You report employment taxes once a year on Schedule H, attached to your personal Form 1040. For the 2026 tax year, Schedule H is due April 15, 2027, and a filing extension on your 1040 covers it automatically.
Because the bill arrives all at once in April, plan ahead for the cash. Two ways to avoid an underpayment penalty: submit a new Form W-4 to your own employer asking for extra federal income tax withholding, or make quarterly estimated payments with Form 1040-ES in April, June, and September 2026 and January 2027.
Before you can report anything, you need an Employer Identification Number. The IRS online application issues one immediately at no cost, or you can file Form SS-4 by mail or fax.
You must give your nanny a completed Form W-2 by February 1 of the following year and send Copy A to the Social Security Administration by the same date. If a nanny leaves mid-year, you can issue the W-2 right away.
Keep records for each household employee showing name, Social Security number, address, hours worked each week, cash wages paid, any amounts claimed for board or lodging, and overtime for hours over 40. Three years is the federal minimum retention period. A spreadsheet is fine.
What Misclassification Actually Costs
Treating your nanny as a 1099 contractor when the law treats them as an employee builds layered exposure that compounds in ways families tend to underestimate.
Back Taxes and Section 3509 Penalties
When the IRS catches the misclassification, you owe the full 7.65% employer FICA share for every year it ran, plus interest. On top of that, Section 3509 of the Internal Revenue Code sets reduced-rate penalties for the amounts you should have withheld from the worker:
- 1.5% of wages paid, for income tax withholding liability.
- 20% of the employee’s share of Social Security and Medicare that should have been withheld.
Those rates assume you at least filed the required information return, such as a 1099 or W-2. If you filed nothing, both rates double: 3% of wages for income tax and 40% of the employee FICA share.
Information Return Penalties
Failing to file a correct W-2 carries its own separate penalty. For returns due in 2026, it starts at $60 per form if filed within 30 days of the deadline and climbs from there, with higher amounts for longer delays or intentional disregard.
Criminal Exposure
Willful misclassification, meaning you knew the nanny was an employee and chose to avoid the obligation, can trigger criminal penalties. Willful failure to collect and pay over employment taxes is a felony carrying fines up to $10,000 and up to five years in prison. Criminal prosecution of household employers is rare but not theoretical, and the IRS treats willfulness very differently from an honest mistake.
Lawsuits From the Nanny
Separate from the IRS, your nanny can sue you directly for unpaid overtime, minimum wage violations, and the benefits a properly classified employee would have received. Misclassification also costs the nanny Social Security credits, unemployment insurance eligibility, and in many cases workers’ compensation coverage. Those are concrete harms that support real damages.
What You Get Back by Classifying Correctly
Families sometimes dodge the nanny tax because they only see the cost. Proper W-2 classification unlocks two tax breaks that offset a meaningful share of it, and neither is available if you pay under the table or issue a 1099.
Dependent Care FSA
If your employer offers a dependent care flexible spending account, you can set aside pre-tax dollars for childcare, including nanny wages. Starting in 2026, the annual cap rises to $7,500 for single filers and married couples filing jointly, up from $5,000. For married filing separately the limit is $3,750. Because the money avoids both income tax and FICA, savings on a full $7,500 contribution can top $2,000 depending on your bracket.
Child and Dependent Care Tax Credit
Families who do not use an FSA, or who have expenses beyond their FSA contribution, may claim the child and dependent care tax credit. It applies to a percentage of qualifying expenses, up to $3,000 for one child or $6,000 for two or more children under 13. The percentage ranges from 20% to 35% based on your adjusted gross income. You cannot claim the credit on expenses already run through an FSA.
Both benefits require you to list your care provider’s name and Social Security number or taxpayer ID on your return. That paperwork trail is incompatible with off-the-books pay and is why proper classification is what makes the tax breaks possible.
What Workers’ Comp Has to Do With It
Most states require workers’ compensation coverage for household employees, with the specific trigger varying by state. Standard homeowners policies generally exclude injuries to domestic workers who are required by law to be covered by workers’ comp. If your nanny is hurt on the job and you have no coverage because you treated them as a contractor, you are personally on the hook for medical bills and lost wages. Call your carrier before you assume your homeowners policy will catch you.
Agencies Do Not Change the 1099 Answer
Hiring through an agency does not convert a nanny into an independent contractor. What matters is which agency model you used.
A referral or placement agency matches you with a nanny and then steps away. The employment relationship is between you and the nanny, which means you handle payroll, withholding, Schedule H, and compliance. You are the employer, and you can claim household employer tax benefits.
An employer-of-record agency keeps the nanny on its own payroll and handles tax withholding, W-2s, and compliance. You pay an hourly markup covering wages plus overhead. Administration is simpler, but you generally cannot claim the FSA or child care credit as the employer because you are not the employer of record.
Either way, if the nanny works in your home on your schedule, they are an employee of someone. The only question is whether that someone is you or the agency. It is never 1099.