Nanny Tax Rules: What Household Employers Must Know

Hiring a nanny, housekeeper, or other in-home worker can make life easier—but it also comes with important tax obligations. Many families don’t realize that when they hire someone to work in their home, they may become household employers under IRS rules. This means they’re responsible for paying Social Security, Medicare, unemployment taxes, and handling tax reporting properly.

Failing to comply with nanny tax rules can lead to penalties, interest, and even legal trouble. But with the right knowledge and systems in place, household employers can stay compliant and avoid costly mistakes.

This guide covers everything you need to know about nanny tax rules, from determining who qualifies as a household employee to meeting IRS and state requirements.

Who is a Household Employee?

A household employee is someone you hire to perform work in or around your private home, and you control what work is done and how it’s done. This definition is crucial because it determines whether tax obligations apply.

Common household employees include:

• Nannies
• Babysitters (regular, scheduled work)
• Housekeepers
• Cooks
• Gardeners
• Elder care aides (if privately hired)

The IRS draws a clear distinction between employees and independent contractors. If you set the person’s schedule, supervise their work, and provide tools or materials, they are most likely an employee.

People hired through an agency, or self-employed workers who provide services to multiple clients and use their own equipment, may not be considered household employees. However, casual babysitters (like teenagers occasionally watching kids for a few hours) typically do not qualify either.

Understanding the classification is the first step toward complying with nanny tax rules.

Wage Thresholds and Taxes Owed

Once you determine you’ve hired a household employee, you need to understand the tax thresholds and types of taxes owed.

As of 2024, here are the key rules:

• If you pay a household employee $2,700 or more in cash wages during the year, you must withhold and pay Social Security and Medicare taxes (FICA).
• You are responsible for paying the employer’s share (7.65%) and withholding the employee’s share (7.65%), for a total of 15.3%.
• You may also owe federal unemployment tax (FUTA) if you pay $1,000 or more in any calendar quarter. The FUTA tax rate is 6%, but most employers qualify for a credit that reduces it to 0.6%.
• In addition to federal taxes, you may owe state unemployment insurance (SUI), disability insurance, and other state-specific taxes. These vary by location.

You are not required to withhold federal income tax from a nanny’s pay unless they request it using a completed Form W-4. However, many employers choose to withhold this voluntarily to help the employee avoid a tax bill at year-end.

How to Comply with Nanny Tax Rules

Complying with nanny tax rules may seem overwhelming, but breaking it down into steps can make the process manageable.

1. Obtain an Employer Identification Number (EIN): This is required for filing employment tax forms. You can apply for an EIN online through the IRS website.
2. Verify work eligibility: Complete Form I-9 for your nanny or household worker to confirm they are authorized to work in the U.S.
3. Withhold and pay the proper taxes: Calculate Social Security and Medicare taxes based on gross wages. Withhold the employee portion from each paycheck and match it with the employer’s portion.
4. Pay federal and state unemployment taxes: If applicable, calculate FUTA and SUI based on the thresholds in your area. These are typically paid quarterly.
5. File Schedule H with your tax return: Each year, file Schedule H with your personal income tax return to report wages paid, taxes withheld, and taxes owed.
6. Provide a W-2 to your employee: By January 31 each year, provide your nanny with a Form W-2 showing their total wages and taxes withheld. File Copy A with the Social Security Administration by the same deadline.
7. Keep good records: Maintain copies of W-2s, I-9s, payment records, and all tax filings. Documentation is key if the IRS ever audits your household employment practices.

Many families choose to use a nanny payroll service or work with a tax professional to automate these responsibilities and stay compliant.

Avoiding Common Mistakes with Nanny Tax Rules

Even well-meaning families can make costly mistakes if they’re not familiar with nanny tax rules. Here are some of the most common errors to avoid:

• Paying under the table – Cash payments without tax reporting are illegal. This puts both the employer and employee at risk for back taxes and penalties.
• Misclassifying the worker as an independent contractor – If you control how and when the work is performed, the worker is an employee. Misclassification can result in large tax liabilities.
• Missing the wage threshold – Some families assume taxes don’t apply if they pay less than $2,700 per year, but FUTA and state taxes may apply at lower thresholds.
• Forgetting to file Schedule H – Even if all taxes are paid, failing to file this form can result in IRS notices or penalties.
• Not checking state-specific requirements – Every state has its own rules for unemployment and disability taxes. Be sure to comply with both federal and state laws.
• Skipping a written agreement – While not required, a written employment agreement outlining pay, duties, and schedule can help avoid misunderstandings and support tax filings.

Avoiding these mistakes helps protect your household from IRS scrutiny and ensures your employee receives the benefits they’re entitled to.

Benefits of Following Nanny Tax Rules

While handling nanny tax compliance adds responsibility, it also comes with important benefits for both the household employer and the employee. Paying “on the books” provides protections, avoids penalties, and helps create a transparent, professional relationship.

Here are a few advantages:

• Avoid IRS and state penalties – By properly withholding and paying taxes, you eliminate the risk of audits, back taxes, interest, and fines.
• Qualify for tax breaks – Families may be eligible for tax credits like the Child and Dependent Care Credit or the Dependent Care FSA, but only if they report the nanny’s wages correctly.
• Support your nanny’s future – Complying with the tax rules ensures your employee earns Social Security and Medicare credits, which are critical for retirement and disability benefits.
• Unemployment coverage – If your nanny is laid off or let go, they may qualify for unemployment benefits, which are only available if taxes have been properly paid.
• Professional relationship – A formal payroll arrangement encourages accountability, documentation, and clarity for both parties.

These benefits make it clear that following nanny tax rules isn’t just about avoiding trouble—it’s about creating long-term stability and trust for everyone involved.

Need Help Interpreting Nanny Tax Rules?

Becoming a household employer carries more responsibility than many people realize—but staying compliant with nanny tax rules is critical. If you pay a nanny, housekeeper, or other in-home worker above the wage thresholds, you’re required to withhold and pay employment taxes, issue proper forms, and file annual reports.

While the process may seem complicated, the peace of mind and legal protection are well worth the effort. Plus, your household employee gains access to important benefits like Social Security credits and unemployment insurance.

At Dimov Tax, we help families navigate the complexities of household employment tax compliance. From setting up payroll systems to handling annual filings, we make sure your household is covered—so you can focus on what matters most.

Contact Dimov Tax today to get expert guidance on nanny tax rules and stay confidently in compliance.