How to Correctly Pay a Nanny on the Books

Paying a household employee “on the books” means adhering to federal and state tax and labor laws, treating them as a legitimate employee rather than an independent contractor. This approach involves proper payroll processing, tax withholding, and timely tax payments and filings. Compliance with these regulations helps household employers avoid legal penalties, back taxes, and interest charges. Understanding these obligations ensures a transparent and lawful employment relationship, providing benefits and protections for both the employer and the employee.

Understanding Your Employer Responsibilities

Household employers assume several federal tax responsibilities, including contributions to Social Security, Medicare, and unemployment insurance. Social Security and Medicare taxes, collectively known as Federal Insurance Contributions Act (FICA) taxes, are shared between the employer and employee. For 2024, both the employer and employee each contribute 6.2% for Social Security on wages up to $168,600, and 1.45% for Medicare on all wages, with no wage limit. The employer is responsible for withholding the employee’s share from their wages and remitting both portions to the Internal Revenue Service (IRS).

Employers also pay Federal Unemployment Tax Act (FUTA) taxes, which fund unemployment benefits for workers who lose their jobs. FUTA is an employer-only tax, typically at a rate of 6% on the first $7,000 of an employee’s wages. However, employers can usually claim a credit of up to 5.4% for contributions made to state unemployment programs, reducing the effective federal rate to 0.6%.

Beyond taxes, federal wage and hour laws apply to household employees under the Fair Labor Standards Act (FLSA). This act mandates a federal minimum wage, currently $7.25 per hour, for most covered employees. It also requires overtime pay at a rate of one and one-half times an employee’s regular rate of pay for all hours worked over 40 in a workweek.

Initial Setup for Household Employment

Becoming a compliant household employer begins with obtaining an Employer Identification Number (EIN) from the IRS. An EIN is a nine-digit number assigned to employers for tax purposes. This unique identifier is necessary for reporting and paying federal taxes, opening a payroll account, and filing various tax forms. Employers can apply for an EIN online through the IRS website.

After securing an EIN, employers must gather specific information from their nanny to properly set up payroll and verify employment eligibility. The Form W-4, Employee’s Withholding Certificate, allows the employee to indicate their tax withholding preferences.

In addition to tax information, employers must complete Form I-9, Employment Eligibility Verification. This form verifies the nanny’s identity and confirms their authorization to work in the United States. Employers are required to inspect original documents provided by the employee.

Choosing a payroll method is another foundational step for managing household employment. Options include engaging a specialized payroll service, which handles all calculations, withholdings, and tax filings for a fee. Alternatively, employers can use tax software to assist with calculations and form preparation. Some employers may opt to manage payroll manually, which demands a thorough understanding of tax laws and precise record-keeping.

Managing Ongoing Payroll and Tax Filings

Once the initial setup is complete, ongoing payroll management involves calculating wages and withholding appropriate taxes. Employers must determine the nanny’s gross pay, which is their total earnings before any deductions. From this gross amount, the employee’s share of FICA taxes and any federal income tax elected on their Form W-4 must be accurately withheld. The remaining amount is the nanny’s net pay, which is the amount they receive.

Remitting federal taxes requires timely payments to the IRS throughout the year. Household employers typically pay FICA taxes (both employer and employee shares) and any withheld federal income taxes quarterly. These payments are usually made as estimated tax payments or through the Electronic Federal Tax Payment System (EFTPS). FUTA taxes, while calculated annually, may also require quarterly payments if the employer’s liability exceeds a certain threshold, generally $500.

Annual tax filings summarize the year’s payroll and tax activity for both the employer and the employee. By January 31st of each year, employers must provide their nanny with Form W-2, Wage and Tax Statement. This form details the nanny’s gross wages, withheld federal income tax, and FICA taxes for the preceding calendar year. A copy of the W-2 is also sent to the Social Security Administration (SSA).

Additionally, household employers must file Schedule H (Form 1040), Household Employment Taxes, with their personal income tax return. This form reports the total Social Security, Medicare, and FUTA taxes owed for the year, as well as any federal income tax withheld from the nanny’s wages. Finally, employers must submit Form W-3, Transmittal of Wage and Tax Statements, to the SSA along with all copies of the W-2 forms issued.

State-Specific Employment Compliance

Beyond federal requirements, household employers must navigate state-specific employment laws. Most states require employers to register with their state unemployment insurance (SUI) agency and pay SUI taxes. These taxes fund state unemployment benefits and are typically an employer-only contribution, with rates varying significantly based on the state and the employer’s experience rating.

A few states also mandate State Disability Insurance (SDI) contributions, which provide temporary cash benefits to eligible workers experiencing non-work-related illnesses or injuries. Depending on the state, SDI contributions may be paid solely by the employee, shared between the employer and employee, or paid entirely by the employer.

Workers’ compensation insurance is another consideration for household employers, with requirements varying by state. Many states mandate or strongly recommend that employers carry this insurance to cover medical expenses and lost wages for employees who suffer job-related injuries or illnesses. Even where not legally required, securing workers’ compensation coverage can protect employers from potentially significant out-of-pocket costs if a nanny is injured while on duty.

Finally, states may impose additional requirements such as new hire reporting, where employers must report newly hired employees to a state agency within a specified timeframe. Some states also have specific wage laws, paid sick leave mandates, or other regulations that differ from federal standards. Consulting the specific state’s Department of Labor or a similar state agency is prudent to ensure full compliance with all applicable state laws for household employers.