The Nanny Tax: A Guide for Household Employers

If you pay a nanny, babysitter, housekeeper, caregiver, or other household worker more than $2,700 in a year, the IRS considers you a household employer. That means employment taxes, a W-2, and Schedule H. Understanding FICA taxes and payroll tax basics is helpful context. This guide walks through the rules so you can stay compliant without overpaying.

Key Takeaways

• The 2025 threshold is $2,700 — pay above this and you owe nanny taxes.
• You pay the employer's half of FICA (7.65%) and may owe FUTA (up to $420/year).
• File Schedule H with your personal tax return — no separate employer return needed.
• Proper nanny tax compliance unlocks your eligibility for the Dependent Care FSA and Child Care Credit.

When Do Nanny Tax Rules Apply?

You are a household employer if you:

1. Control what work is done and how it is done (the worker is your employee, not an independent contractor).
2. Pay the worker $2,700 or more in a calendar year (2025 threshold; the 2026 amount will be updated when released by the IRS).

Common household employees: nannies, babysitters (who work regularly), housekeepers, cooks, gardeners, caregivers for elderly or disabled family members, private nurses, and drivers.

Not employees: Workers from an agency (the agency is the employer), independent contractors who control how they do the work (rare for household workers), and workers under 18 who are students (unless household work is their principal occupation).

What Taxes You Owe

Total employer cost: 7.65% of wages (FICA) plus up to $420 FUTA. If you pay your nanny $40,000, your employer taxes are approximately $3,480.

Step-by-Step: Setting Up as a Household Employer

1. Get an Employer Identification Number (EIN)

Apply online at the IRS EIN application page. You will receive it immediately. You need an EIN to file Schedule H — do not use your SSN.

2. Have Your Employee Complete Form W-4 and Form I-9

• W-4 determines federal income tax withholding (optional for household employees, but recommended).
• I-9 verifies work authorization. You keep this on file — do not send it to any agency unless asked.

3. Set Up Payroll

You can run payroll yourself, use a service like SurePayroll or HomePay, or simply calculate and remit manually each pay period. At minimum, track:

• Gross wages paid
• Social Security and Medicare taxes withheld
• Federal income tax withheld (if elected)
• State/local taxes withheld (if applicable)

4. Pay Taxes Throughout the Year

You have two options to remit the taxes:

• Increase your own W-4 withholding at your regular job to cover the nanny tax.
• Make quarterly estimated tax payments that include the household employment taxes.

You do not need to make separate employment tax deposits like a business would — Schedule H handles it.

5. File Schedule H with Your Tax Return

At year-end, file Schedule H with your Form 1040. This reports:

• Total cash wages paid
• Social Security and Medicare taxes (employer and employee shares)
• FUTA tax
• Federal income tax withheld (if any)

6. Issue a W-2 to Your Employee

By January 31, provide your employee a W-2 showing their wages and taxes withheld. You must also file Copy A with the Social Security Administration (SSA). You can file W-2s online at the SSA employer W-2 filing portal.

Unlock Child Care Tax Benefits

Here is the hidden upside of nanny tax compliance: it makes you eligible for valuable tax breaks.

• Dependent Care FSA: Exclude up to $5,000 of dependent care expenses from your income (saving you $1,200+ in taxes if you are in the 24% bracket). Only available if you have a legally paid caregiver.
• Child and Dependent Care Credit: Claim 20-35% of up to $3,000 (one child) or $6,000 (two or more children) in care expenses.

These benefits often offset a significant portion of the nanny tax cost. To claim the Child Tax Credit, your child must meet the dependent rules. Qualifying for Head of Household filing status further increases your standard deduction and widens your tax brackets.

State Requirements

Most states have additional requirements:

• State unemployment insurance (SUI): Many states require registration and quarterly tax filings.
• State income tax withholding: Some states require it; others make it optional.
• Workers’ compensation insurance: Required in many states for household employees.
• Disability insurance: Required in states like New York, New Jersey, and California.

Check your state’s department of labor website for specific requirements.

Common Mistakes to Avoid

• Misclassifying a nanny as an independent contractor. The IRS considers most household workers employees because you control how and when the work is done. Misclassification triggers back taxes, penalties, and interest. See our independent contractor taxes guide for the distinction.
• Not adjusting your own withholding. If you do not increase your W-4 withholding or make estimated tax payments, you may face an underpayment penalty at filing time.
• Forgetting to issue a W-2. You must provide a W-2 by January 31 — failure to do so can result in IRS penalties.
• Overlooking the tax benefits. Many families pay the nanny tax but forget to claim the Dependent Care FSA or Child Care Credit, leaving money on the table.

How sharper.tax Helps

sharper.tax analyzes your tax return and identifies whether you may be a household employer based on your reported income and deductions. We flag missed Dependent Care FSA and Child Care Credit opportunities and help you understand the overall tax impact of hiring household workers. Sophisticated tax planning used to require a high-end CPA — we make it available for free.

Sources

• IRS Publication 926: Household Employer’s Tax Guide
• IRS Schedule H Instructions
• IRS Topic 756: Employment Taxes for Household Employees

The information above is educational and not tax advice.