“Our most basic instinct is not for survival but for family.” – Paul Pearsall
It might seem insignificant how you pay your nanny, but there are actually big risks if you don’t pay attention to the IRS’s rules.
Because you cannot just pay your nanny under the table. Unless you want to face IRS penalties for tax evasion, liability for unpaid employment taxes, plus interest and penalties, state labor law violations … I think you get the point.
But know this isn’t just about appeasing the IRS. This is about doing what’s best for your family’s protection and prosperity. That’s important to you (and to me, believe it or not).
So, for their sake, let’s remove some of the ambiguity around the nanny tax.
“How do I classify my nanny?”
Most nannies are classified as household employees, not independent contractors. The IRS defines a household employee as someone you hire to work in your home, and you control how and when they perform their work (the key word there: control). An independent contractor, on the other hand, controls how they do their work while allowing their client to control the end result.
“What taxes do I have to pay?”
Whether you employ your nanny part-time or full-time, you’re required to withhold and pay…
- Social Security and Medicare taxes (FICA): If you paid your nanny 2.7K or more in 2024 (2.8K in 2025), you each pay 6.2 percent in Social Security tax and 1.5 percent in Medicare tax. (the same premiums I mention above).
- Federal unemployment tax (FUTA): 6 percent on the first 7K of wages, if you pay your household employee 1K or more in any calendar quarter. (However – if you pay state unemployment tax (SUTA) in a credit-reduction-exempt state, you might qualify for a credit that would knock the FUTA rate down to 0.6 percent.)
- State unemployment tax (SUTA): Depending on where you live, you may have to pay state unemployment insurance or disability insurance taxes. I’m happy to help clarify your state’s specific rules about this.
“Do I need to withhold income tax?”
Not necessarily – unlike FICA and unemployment taxes, withholding federal and state income tax for a household employee is optional. Your nanny can opt to make quarterly estimated payments instead.
But, if your nanny requests withholding, you have to use a W-4 to determine the correct amount to withhold from their wages.
“How do I report and pay nanny taxes?”
Step 1: Apply for an Employer Identification Number (EIN) from the IRS using Form SS-4 (or with the IRS’s nifty online application).
Step 2: Gather your nanny’s information, including their W-4 (if they’ve chosen withholding), their I-9, and any state withholding forms.
Step 3: Register for state unemployment tax (if your state requires this – which most do, if you pay your nanny above a certain threshold). You’ll register for a state unemployment tax account with your state’s labor or tax department, and then file and pay quarterly state unemployment tax reports.
Step 4: Withhold and pay the Social Security and Medicare and federal unemployment taxes I mentioned earlier at tax time (if you’ve crossed the payment thresholds) to the IRS via Schedule H on your 1040.
Step 5: Make quarterly estimated payments (with Form 1040-ES) if you don’t have enough federal tax withholding from your own paycheck to cover the nanny tax liability. Yes, your own federal tax withholding could potentially cover your nanny tax liability when you file your taxes (which is probably your best bet for avoiding penalties, if you think your total tax owed, including your nanny taxes, will be 1K or more).
Step 6: Be ready to file year-end forms. By January 31 of next year, you’ll need to complete Form W-2 and get it to your nanny, and file a W-3 (attached with the W-2) with the Social Security Administration by the same date. Then, file Schedule H with your 1040. And, depending on your state’s rules, you might have to file a state W-2 and state unemployment tax reports.
And if you haven’t kept up with your nanny taxes in years past, you’ll need to file an amended return and pay any taxes owed – ideally before the IRS penalizes you.
“Are there credits or deductions I can take advantage of here?”
Yes – but with some conditions. If your nanny’s services make it possible for you and your spouse (filing jointly) to work, you could be eligible for the Child and Dependent Care Credit – 20-35 percent of 3K per child, depending on your adjusted gross income (6K max for two or more children).
You can spend up to 5K in pre-tax FSA dollars towards childcare, but you can’t claim the Child and Dependent Care Credit for any expenses you paid for with those pre-tax FSA funds. No double-dipping allowed here.
Whew – nanny taxes can be confusing, and the penalties involved with making an honest mistake are scary. So, if you’d like to have total confidence you’ve got all the details covered, let’s have a chat. Getting reassurance from your trusted tax professional is worth it – for your own peace of mind.
