Nanny Payroll & Taxes: The Complete Guide to Paying Your Nanny Legally in 2026

Hiring a nanny comes with a responsibility many parents don't expect: you become an employer. That means payroll, taxes, paperwork, and compliance with employment laws. It's not as simple as handing over cash every week.

The "nanny tax" has tripped up everyone from cabinet nominees to regular families. Getting it wrong can result in penalties, back taxes, and even criminal charges. Getting it right protects both you and your nanny while unlocking valuable tax benefits.

This guide covers everything you need to know about paying your nanny legally, from understanding your obligations to setting up payroll and maximizing your tax savings.

Am I Really an Employer?

The Household Employer Test

You are a household employer if:

• You hire someone to work in your home
• You control what work is done AND how it's done
• You set the schedule
• You provide the tools/supplies

You're NOT an employer if:

• You hire an independent contractor (business that controls their own work)
• You use an agency that employs the caregiver
• The caregiver works for multiple families and controls their own schedule

Why Your Nanny Isn't an Independent Contractor

Many parents want to classify their nanny as an independent contractor to avoid employer obligations. This is almost always wrong and illegal.

The IRS uses a multi-factor test:

| Factor | Employee | Independent Contractor | |--------|----------|------------------------| | Who controls schedule? | You | They do | | Who sets duties? | You | They do | | Who provides supplies? | You | They do | | Do they work for others? | Usually no | Yes, multiple clients | | Is work ongoing? | Yes | Project-based |

For nannies: You control the schedule, duties, and how work is performed. Your nanny works exclusively (or primarily) for you. This is an employment relationship.

Misclassification consequences:

• Back payment of all employer taxes
• Penalties and interest
• Potential criminal charges for willful misclassification
• Your nanny loses unemployment, workers' comp, and Social Security benefits

Exceptions

You may NOT be an employer if:

• You use a nanny agency that employs the nanny directly
• You participate in a nanny share where another family handles payroll
• The caregiver truly operates as a business (rare for nannies)

Understanding Nanny Tax Requirements

The Tax Threshold: When Nanny Taxes Apply

2026 thresholds:

Social Security and Medicare taxes: Required if you pay a household employee $2,800 or more in cash wages in 2026.

Federal Unemployment Tax (FUTA): Required if you pay household employees $1,000 or more in any calendar quarter.

State taxes: Vary by state—some have lower thresholds.

Example calculations:

| Pay Structure | Annual Amount | Nanny Tax Required? | |---------------|--------------|---------------------| | $15/hour, 40 hours/week | ~$31,200 | Yes | | $18/hour, 30 hours/week | ~$28,080 | Yes | | $20/hour, 10 hours/week | ~$10,400 | Yes | | $15/hour, 3 hours/week | ~$2,340 | No (under threshold) |

Bottom line: If you employ a full-time or even most part-time nannies, you need to handle taxes properly.

What Taxes You Need to Pay

Taxes withheld from nanny's pay:

• Social Security: 6.2% of wages
• Medicare: 1.45% of wages
• Federal income tax: Based on W-4 (optional)
• State income tax: Based on state (varies)

Taxes you pay as employer:

• Social Security: 6.2% (matching nanny's share)
• Medicare: 1.45% (matching nanny's share)
• Federal Unemployment (FUTA): 6% on first $7,000, reduced by state credits
• State Unemployment: Varies by state (typically 2-6% on first $7,000-$50,000)

Total employer cost: Roughly 7-10% above gross wages.

Example: Full Tax Calculation

Scenario: Nanny paid $20/hour, 40 hours/week, 52 weeks

Gross wages: $41,600

Withheld from nanny:

• Social Security: $2,579 (6.2%)
• Medicare: $603 (1.45%)
• Federal income tax: Depends on W-4
• State income tax: Depends on state

Employer pays:

• Social Security match: $2,579
• Medicare match: $603
• FUTA (after state credit): ~$42 (0.6% on $7,000)
• State unemployment: ~$200-$400 (varies)

Total employer taxes: ~$3,424-$3,624 (about 8-9% of wages)

Nanny's take-home: Gross minus withholdings (or gross if you've agreed to pay employer share only)

Setting Up Payroll

Step 1: Get Your Federal Employer ID (EIN)

What it is: Your Employer Identification Number—like a Social Security number for your business.

How to get it: Apply online at IRS.gov. It's free and instant.

You'll need it for: Tax filings, W-2s, state registrations.

Step 2: Register with State Agencies

Required registrations vary by state but typically include:

• State unemployment insurance account
• State withholding tax account
• Workers' compensation (required in most states)

How to find requirements: Search "[Your State] new employer registration" or check your state's labor department website.

Step 3: Complete Employee Paperwork

Required forms:

• Form I-9: Verifies employment eligibility (keep on file)
• Form W-4: Determines federal tax withholding
• State W-4 equivalent: For state withholding (if applicable)

Get from nanny:

• Social Security number (for W-2)
• Current address
• Emergency contact information

Step 4: Choose a Payroll Method

Option 1: Do it yourself

• Calculate taxes manually
• Make quarterly estimated tax payments
• File annual Schedule H with your tax return
• Issue W-2 by January 31

Pros: Cheapest option Cons: Time-consuming, error-prone, easy to miss deadlines

Option 2: Use payroll software

• Tools like SurePayroll, Gusto, or QuickBooks Payroll
• Automatic tax calculations
• Direct deposit
• Tax filing included or add-on

Pros: Accurate, time-saving Cons: Monthly fees ($40-100+)

Option 3: Use a nanny tax service

• Specialized services like HomePay, NannyChex, GTM Payroll
• Handle all aspects of household employment
• Expertise in nanny-specific issues
• Year-end tax documents

Pros: Full service, expert support Cons: Highest cost ($1,000-2,000/year)

Payroll Service Comparison

| Service | Monthly Cost | What's Included | Best For | |---------|--------------|-----------------|----------| | DIY | Free | Nothing—you do it all | Very budget-conscious | | SurePayroll | $40-60 | Basic payroll, tax filing | Budget-minded with some help | | Gusto | $40-80 | Full payroll, benefits options | Tech-savvy families | | HomePay | $80-100 | Full service, expert support | Hands-off approach | | NannyChex | $75-100 | Full service, compliance help | Complex situations | | GTM Payroll | $100+ | Premium service, tax guarantee | Maximum protection |

Step 5: Establish Pay Schedule

Common options:

• Weekly (most common for nannies)
• Bi-weekly
• Semi-monthly

Consider:

• Nanny preference
• Your cash flow
• State requirements (some states mandate minimum pay frequency)

Step 6: Set Up Payment Method

Direct deposit:

• Most convenient
• Nanny provides bank info
• Set up through payroll service

Paper check:

• More work for you
• Nanny must deposit/cash
• Creates paper trail

Cash:

• Legal if you still withhold and report taxes
• Risky for record-keeping
• Not recommended

Tax Filing Requirements

Quarterly Obligations

Estimated tax payments: If you expect to owe $1,000+ in household employment taxes, make quarterly payments to avoid penalties.

Deposit schedule: Either quarterly or per pay period, depending on total liability.

State requirements: Vary—many states require quarterly unemployment insurance filings.

Annual Obligations

By January 31:

• Provide W-2 to nanny
• File W-2 Copy A with Social Security Administration
• Provide W-2 copies to state (if required)

With your personal tax return (April 15 or extension):

• File Schedule H (Household Employment Taxes)
• Report wages and taxes owed
• Pay any remaining balance

State filings:

• Annual unemployment reconciliation
• State withholding reconciliation
• Workers' comp annual audit (if applicable)

Record Keeping

Keep for at least 4 years:

• I-9 forms
• W-4 forms
• Payroll records (dates, hours, wages)
• Tax payment records
• Correspondence

Recommended: Keep records indefinitely—storage is cheap, penalties are expensive.

Common Payroll Structures

Gross vs. Net Pay Agreements

Gross pay agreement: You agree on gross wages; nanny pays their share of taxes from that amount.

Example:

• Agreed gross: $1,000/week
• Employee taxes withheld: ~$77
• Nanny receives: ~$923

Net pay agreement: You agree on take-home pay; you cover all taxes.

Example:

• Agreed net: $1,000/week
• You gross up to cover taxes: ~$1,086
• You pay additional employer taxes on that amount

Which is standard? Gross pay is more common and simpler. Net pay can get expensive quickly.

Handling Overtime

Federal overtime rules apply to household employees:

• Non-exempt employees (most nannies) get 1.5x pay for hours over 40/week
• Some states have stricter rules (California, New York)
• Live-in nannies may have different rules (check your state)

Example:

• Base rate: $20/hour
• 45 hours worked
• Regular pay: 40 × $20 = $800
• Overtime: 5 × $30 = $150
• Gross pay: $950

Guaranteed Hours

Common practice: Nanny is paid for agreed-upon hours regardless of whether you need them.

Example: If you cancel a day, nanny is still paid.

Benefits: Provides nanny income stability, ensures availability.

Tax treatment: Pay taxes on all guaranteed hours, even if not worked.

Paid Time Off

What to provide:

• Vacation days (typically 1-2 weeks for full-time)
• Sick days (increasingly required by state/city laws)
• Holidays (typically 5-10 paid holidays)

Tax treatment: PTO is taxable wages—no difference from regular pay.

Tax Benefits for Parents

Dependent Care FSA

What it is: Pre-tax account to pay for childcare.

2026 limit: $5,000/year (or $2,500 if married filing separately).

Tax savings: Reduces taxable income, saving you your marginal tax rate.

Example:

• $5,000 in FSA contributions
• 24% tax bracket
• Savings: $1,200 in federal taxes (plus state and FICA)

Requirement: Your nanny must provide their Social Security number, and you must file taxes correctly.

Child and Dependent Care Tax Credit

What it is: Tax credit for childcare expenses.

2026 credit:

• Up to 35% of qualifying expenses (income-based)
• Maximum expenses: $3,000 for one child, $6,000 for two+
• Maximum credit: $1,050 for one child, $2,100 for two+

FSA vs. Credit: You can't double-dip—expenses reimbursed through FSA don't qualify for the credit. Calculate which saves more.

When credit is better: Lower-income families (higher credit percentage) When FSA is better: Higher-income families, higher marginal tax rate

Additional Deductions

If nanny performs household work: If your nanny also does housekeeping, that portion is NOT eligible for childcare tax benefits but may be relevant for other purposes.

Medical expense deduction: If your nanny provides medically necessary care (for special needs children), you may qualify for medical expense deductions.

Home office deduction: If you work from home, nanny care may support a home office deduction (consult tax advisor).

State-Specific Requirements

States with Notable Requirements

California:

• State disability insurance required
• Paid family leave contributions
• Mandatory paid sick leave (3+ days)
• Overtime after 9 hours/day or 45 hours/week (domestic workers)

New York:

• Paid family leave contributions
• Mandatory paid sick leave
• Specific workers' comp requirements

Massachusetts:

• Paid family and medical leave program
• Higher minimum wage

Washington:

• Long-term care payroll tax (WA Cares)
• Paid family leave

Illinois:

• Paid Leave for All Workers Act

New Jersey:

• Family leave insurance
• Disability insurance

Workers' Compensation

Required in most states: You must carry workers' comp insurance for household employees.

How to get it:

• Add to your homeowner's policy
• Buy separate policy
• State fund (in some states)

Cost: Typically $300-600/year for one employee.

Exemptions: Some states exempt employers with very few hours or low wages—check your state.

Common Mistakes to Avoid

Mistake 1: Paying Under the Table

Why it happens: Seems simpler, saves money.

Why it's wrong:

• Illegal—tax evasion
• Penalties can exceed what you "saved"
• Your nanny loses unemployment benefits if job ends
• Your nanny loses Social Security credits
• You lose tax benefits (FSA, care credit)

Bottom line: The perceived savings aren't worth the legal and ethical risks.

Mistake 2: Misclassifying as 1099 Contractor

Why it happens: Avoiding employer obligations.

Why it's wrong:

• Nannies are almost never legitimate contractors
• IRS specifically targets this misclassification
• Back taxes, penalties, and interest

Test yourself: Do you control the schedule and how work is done? If yes, they're an employee.

Mistake 3: Missing the Threshold

Why it happens: Thinking part-time nannies don't count.

The math: $2,800/year is just ~$54/week. Most regular caregivers exceed this.

Solution: Calculate annual wages early; if you'll hit the threshold, set up properly from day one.

Mistake 4: Not Withholding State Taxes

Why it happens: Focusing only on federal requirements.

The problem: Many states have their own registration, withholding, and unemployment requirements.

Solution: Research your state's requirements or use a payroll service that handles state compliance.

Mistake 5: Late W-2s

The deadline: January 31. This is firm.

Penalties: $60-310 per late W-2, depending on how late.

Solution: Use a payroll service that automatically generates W-2s, or mark your calendar early.

Mistake 6: Not Documenting Hours

Why it matters:

• Overtime calculations
• Audit protection
• Unemployment claims

Solution: Use a time-tracking app or simple log that nanny signs off on weekly.

Handling Special Situations

Nanny Shares

How payroll works in a share:

• Each family is a separate employer
• Each family handles their own payroll
• Nanny receives two W-2s

Splitting costs:

• Common: Split based on hours in each home
• Alternative: Split based on number of children
• Define in written agreement

Tax threshold: Each family's wages count separately toward the threshold.

Live-In Nannies

Special considerations:

• Room and board may have tax implications
• Different overtime rules in some states
• Minimum wage requirements still apply (for cash wages)

Room and board value:

• Generally not included as taxable wages if primarily for employer's benefit
• Consult a tax professional for your situation

Traveling with Your Nanny

Overtime: Travel time may count toward overtime calculations.

Per diem: You may provide tax-free per diem for food and incidentals.

International travel: Complex tax implications—consult professional.

Nanny Leaving Employment

Final paycheck:

• Some states require immediate payment
• Others allow next regular payday
• Check your state's rules

Unemployment:

• Your nanny may file for unemployment benefits
• Your rate may increase based on claims
• Cannot deny valid claims

Severance:

• Not legally required
• Often provided: 1-2 weeks per year of service
• Taxable as regular wages

Getting Help

When to Use a Professional

DIY is fine if:

• Simple situation (one employee, one state)
• You're comfortable with paperwork
• You have time to manage deadlines
• Basic tax situation

Get help if:

• Live-in nanny situation
• Nanny share
• Multiple states involved
• Previous tax issues
• No time/interest in managing payroll

Finding a Tax Professional

Look for:

• Experience with household employment (not all CPAs have this)
• Clear fee structure
• Responsiveness
• Audit support

Questions to ask:

• Do you specialize in household employment?
• How many nanny tax clients do you have?
• What's included in your fee?
• Will you represent me if audited?

Key Takeaways

You are an employer if:

• Your nanny works in your home
• You control the schedule and duties
• Annual wages exceed $2,800 (2026)

Your obligations include:

• Getting an EIN
• Registering with state agencies
• Withholding employee taxes
• Paying employer taxes
• Filing quarterly/annual returns
• Issuing W-2 by January 31
• Carrying workers' compensation (most states)

Tax benefits available:

• Dependent Care FSA ($5,000 pre-tax)
• Child and Dependent Care Credit
• Possible medical deductions

Best practices:

• Use a payroll service (simpler, fewer mistakes)
• Start correctly from day one
• Keep thorough records
• Never pay under the table

Getting it right: Protects you legally, supports your nanny fairly, unlocks valuable tax benefits, and lets you focus on what matters—your family.

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