Nanny Tax and Compliance Guide: What You Owe, How to Pay, and What Happens If You Don't

The "Nanny Tax" Basics: Who Owes What

The term "nanny tax" is informal — it refers to the household employer's share of FICA (Social Security + Medicare) plus federal and state unemployment taxes. The IRS threshold is simple: if you pay a household employee $2,700 or more in cash wages in 2025, you must withhold and pay FICA. This threshold is indexed for inflation and adjusts annually (it was $2,600 in 2023, $2,700 in 2024 and 2025).

"Household employee" means someone who works in your home and whose work you control — not just what they do, but when and how. A nanny who arrives at 8 AM, follows your schedule, uses your supplies, and cares for your children in your home is an employee. Full stop. The distinction matters because employees get W-2s; independent contractors get 1099s. Almost every nanny is an employee (more on this below).

Step-by-Step: Your Employer Obligations

1. Get an EIN from the IRS (free)

You need an Employer Identification Number before you can file payroll taxes. It's free and takes 5 minutes online at IRS.gov (Form SS-4). You can also apply by phone, fax, or mail, but online is instant. You'll get your EIN immediately upon completing the application. Keep it — you'll use it on every tax filing.

2. Verify work authorization (Form I-9)

Within three business days of your nanny's start date, you must complete Form I-9 to verify their identity and employment eligibility. You'll examine original documents (passport, driver's license + Social Security card, etc.) and record them on the form. You don't file Form I-9 anywhere — you keep it on file for three years after the hire date or one year after employment ends, whichever is later. If ICE audits you, you produce it.

3. Withhold FICA taxes (7.65% employee share)

Each pay period, withhold 7.65% from your nanny's gross pay — that's 6.2% for Social Security and 1.45% for Medicare. You must also pay a matching 7.65% as the employer. Combined, that's 15.3% of gross wages going to FICA.

On a $41,600/year salary, the employer FICA cost is $3,182. The employee also pays $3,182 via withholding — they take home $38,418.

Federal income tax withholding is optional for household employers. If your nanny asks you to withhold federal income tax, you can — use Form W-4 to determine the amount. But unlike a regular business, you're not required to. Most nanny payroll services handle this automatically if elected.

4. Pay FUTA (federal unemployment tax)

If you pay $1,000 or more in any calendar quarter, you owe Federal Unemployment Tax (FUTA). The gross rate is 6% on the first $7,000 of wages. However, if your state has a conforming unemployment program (all states do), you get a 5.4% credit, reducing the effective FUTA rate to 0.6%. That's $42/year — barely anything, but you still have to pay it.

5. Register for state unemployment tax (SUTA)

Every state has its own unemployment insurance program with different rates and wage bases. Typical new-employer SUTA rates range from 2–4% on the first $7,000–$15,000 of wages (the wage base varies by state). Some states also require disability insurance (CA, HI, NJ, NY, RI) or paid family leave contributions.

You'll register with your state's workforce/labor agency when you hire your first household employee. Annual cost estimate: $140–$280 on a $41,600 salary (varies significantly by state — California's wage base is $7,000; Washington's is $67,600).

6. Get workers' compensation insurance

Most states require workers' comp coverage for household employees. Even in states that don't require it, it protects you — if your nanny gets injured on the job, workers' comp covers medical bills and lost wages. Without it, you're personally liable. Cost: $200–$500/year for a household employee, typically added as a rider to your homeowner's policy or purchased as a standalone policy through your state's fund.

7. File Schedule H with your tax return

This is where it all comes together. Schedule H (Form 1040) is the "Household Employment Taxes" form — you attach it to your personal income tax return. It reports your total household employee wages, FICA withheld and owed, and FUTA. You may need to increase your estimated tax payments or adjust your W-4 withholding at your own job to cover the additional tax — the IRS doesn't want a surprise bill in April.

8. Issue a W-2 by January 31

By January 31 of the following year, you must give your nanny a W-2 showing total wages paid and taxes withheld. You also file Copy A of the W-2 with the Social Security Administration (SSA) along with Form W-3. If you use a payroll service, they handle all of this. If you DIY it, the SSA's Business Services Online portal lets you file electronically for free.

True Cost Calculator

Enter your nanny's hourly rate and weekly hours to see the full employer cost above their salary. This calculator covers FICA, FUTA, estimated state unemployment, and workers' compensation.

Consequences of Not Paying Nanny Taxes

IRS penalties

The IRS imposes a $50 penalty per W-2 you fail to file, plus a failure-to-pay penalty of 0.5% per month (up to 25%) on unpaid taxes, plus interest on the balance. If you didn't withhold the employee's share of FICA, you owe that too — and you cannot legally recover it from the employee after the year ends. On a $41,600 salary, the unpaid employer FICA alone is $3,182. Add the employee's share you should have withheld, penalties, and interest, and a single year of non-compliance can cost $7,319+.

Your nanny loses protections

When you don't pay nanny taxes, your employee doesn't accumulate Social Security credits (affecting their future retirement benefits), can't collect unemployment insurance if you terminate them, and has no workers' comp coverage if they're injured in your home. These aren't abstract risks — nannies who discover their employer hasn't been paying taxes often file complaints with state labor boards, which triggers audits.

"Nannygate": it can end careers

The most famous nanny tax cases are political. In 1993, President Clinton nominated Zoe Baird for Attorney General. During confirmation hearings, it emerged that she and her husband had employed undocumented immigrants as a nanny and driver without paying employment taxes. She withdrew her nomination. Clinton's second pick, Kimba Wood, also withdrew after similar revelations (though Wood's situation was legal at the time the employment occurred). The term "Nannygate" stuck, and the IRS saw a surge in household employer filings in the years that followed. If it can derail an AG nomination, it can certainly complicate your life.

Employee vs. Independent Contractor: The IRS 20-Factor Test

Almost every nanny is a W-2 employee, not a 1099 independent contractor. This isn't a choice you make — it's determined by the nature of the working relationship. The IRS uses a multi-factor test (commonly called the "20-factor test" from Revenue Ruling 87-41) that examines behavioral control, financial control, and relationship type.

If you set the nanny's hours, they work in your home, you provide supplies and toys, you direct how they care for your children, and they work exclusively (or primarily) for you — they're an employee. The only scenario where a nanny might be a contractor is if they run their own childcare business, serve multiple clients simultaneously, set their own hours, and use their own methods with minimal direction from you. That describes almost zero live-in or live-out nannies.

Misclassifying an employee as a contractor to avoid payroll taxes is one of the most common audit triggers for household employers. The IRS knows families try this. If caught, you owe all back taxes plus a 100% penalty on the employer's share of FICA you should have paid.

Nanny Tax Payroll Services Compared

Unless you enjoy tax paperwork, a nanny payroll service pays for itself in time savings and error avoidance. They handle payroll processing, tax withholding, quarterly filings, W-2 preparation, and new hire reporting. Cost: $50–$75/month ($600–$900/year).

Prices as of early 2025. All services handle federal and state filings. GTM and HomePay are nanny-specialist firms; SurePayroll is a general payroll provider with a household option.

Annual Compliance Calendar

Here's every deadline you need to hit as a household employer:

Frequently Asked Questions

Do I have to pay nanny taxes?

Yes, if you pay a household employee $2,700 or more in cash wages during 2025. This applies to nannies, housekeepers, senior caregivers, and any household worker you control how and when they work. The only common exceptions are babysitters under 18 (if it's not their main job), your spouse, your child under 21, or your parent. If your nanny works 10+ hours/week, you'll hit the threshold within weeks — it's essentially guaranteed for any regular arrangement.

What happens if I don't pay nanny tax?

The IRS charges $50 per unfiled W-2, plus 0.5%/month on unpaid taxes (up to 25%), plus interest. You also owe the employee's FICA share you failed to withhold — and can't recover it retroactively. Beyond money, your nanny can't collect unemployment if terminated and doesn't accumulate Social Security credits. The most common way families get caught: the nanny files for unemployment after leaving your employment, and the state discovers no employer record exists.

How much extra does nanny tax cost?

Typically 10–12% above gross pay. For a $41,600/year nanny ($20/hr full-time): employer FICA is $3,182, FUTA is $42, state unemployment runs $140–$280, and workers' comp adds $200–$500. Total: $3,564–$4,004/year above salary. Add a payroll service ($600–$900/year) and the all-in overhead is 12–14%.

Can I claim my nanny's wages on my taxes?

Yes — two ways. The Child and Dependent Care Tax Credit (CDCTC) covers up to $3,000 in childcare expenses for one child ($6,000 for two+), giving you a 20–35% credit depending on income. A Dependent Care FSA lets you set aside up to $5,000 pre-tax for childcare expenses. You can use both, but not on the same dollars — see our FSA vs. Tax Credit guide for the optimization strategy.

Does my nanny need to file taxes?

Yes. Your nanny files a personal income tax return like any employee. The W-2 you provide shows their wages and withholdings. If you only withheld FICA (not federal income tax), they may owe income tax when they file — or they may need to make quarterly estimated payments. This is their responsibility, not yours, but it's good practice to mention it when they start so they're not surprised in April.

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