How to Pay a Live-In Nanny: Tax & Payroll Steps

Paying a live-in nanny involves employment and tax responsibilities similar to those of a small business. Understanding these requirements ensures compliance and avoids complications. This guide outlines steps for compensating and managing payroll taxes for a live-in nanny.

Understanding Employment Basics for Nannies

A live-in nanny is almost always classified as a household employee, not an independent contractor. This distinction dictates how wages are handled for tax purposes and what labor laws apply. The IRS and Department of Labor classify based on control. If the family dictates schedule, provides instructions, and furnishes tools, the nanny is an employee. Misclassification can lead to fines, penalties, and back taxes.

Federal labor laws, primarily the Fair Labor Standards Act (FLSA), apply to domestic employees. The FLSA mandates household employees, including live-in nannies, receive at least the federal minimum wage for all hours worked. Live-in domestic service workers are exempt from the FLSA’s overtime requirement when employed by a family, but must still receive at least the federal minimum wage for all hours.

To qualify as “live-in,” a worker must reside on the employer’s premises permanently or for extended periods, typically five days a week (120 hours or more). Employers may exclude non-working periods like sleep and meal times from compensable hours, provided the employee is completely free from duties. If interrupted by work, that time counts as hours worked.

State-specific labor laws impose further requirements. Many states have higher minimum wage rates than the federal minimum, and employers must pay the higher rate. States may also regulate meal and rest breaks, paid sick leave, or specific rules for domestic workers, such as requiring workers’ compensation insurance. Employers should consult their state’s Department of Labor for these requirements.

Calculating Nanny Compensation

Determining gross pay requires attention to hourly rates and minimum wage compliance. Even if a live-in nanny is exempt from federal overtime, their hourly equivalent compensation must meet minimum wage standards for all hours worked. A clear hourly rate and guaranteed weekly minimum help meet wage requirements and provide predictable income. A written work agreement should outline compensation terms, including pay rate, work schedule, and how hours are tracked.

Deducting room and board from wages is permissible under specific conditions, following IRS guidance. The value of meals and lodging can be excluded from taxable income if provided on the employer’s premises, furnished for the employer’s convenience, and, for lodging, required as a condition of employment. For instance, if a live-in nanny must live in the home for duties, lodging typically meets this condition.

Meals provided for the employer’s convenience, such as when the nanny cannot leave the premises, are also exempt from income. This benefits both employer and employee by potentially lowering the taxable wage base and reducing taxable income. State regulations on room and board deductions can be stricter than federal rules; some states may not allow them or impose specific valuation methods. Employers should consult their state’s labor department or tax agency for guidance.

Other permissible deductions, such as pre-tax health insurance premiums, factor into net pay. These reduce the employee’s taxable income. After accounting for wages, bonuses, and subtracting pre-tax deductions and required tax withholdings, the result is the nanny’s net pay. A payroll calculator can assist in accurately determining gross pay, deductions, and net pay, ensuring tax compliance.

Preparing for Payroll Taxes

Employers of live-in nannies are responsible for federal and state payroll taxes. Federal taxes include FICA (Social Security and Medicare) and FUTA (Federal Unemployment Tax Act) taxes. Both employer and employee contribute to FICA taxes, each paying 6.2% for Social Security and 1.45% for Medicare (7.65% total from each). Employers withhold the employee’s share and remit both to the IRS. For 2025, FICA taxes apply if cash wages are $2,800 or more annually.

FUTA tax is solely an employer-paid tax, used to fund unemployment benefits. Employers are generally liable for FUTA tax if they pay cash wages of $1,000 or more to household employees in any calendar quarter. The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee annually. Employers may receive a credit of up to 5.4% against their FUTA tax if they pay State Unemployment Tax Act (SUTA) contributions on time, effectively reducing the federal rate to 0.6% in most cases.

Federal income tax withholding is not mandatory for household employees, but employers must withhold it if the employee requests and provides a completed Form W-4. If withheld, it must be reported and remitted to the IRS. Depending on the state, employers may also need to withhold state income tax and pay State Unemployment Tax Act (SUTA) contributions. State unemployment tax rates and wage bases vary by state, and employers must register with their state’s unemployment agency.

Before running payroll, employers must obtain an Employer Identification Number (EIN) from the IRS. An EIN is a nine-digit number used to identify employers for tax purposes and is required on all tax filings, including the employee’s Form W-2. Applying for an EIN is straightforward and can be completed online through the IRS website, typically by selecting “Sole Proprietor” and then “Household Employer.” An EIN can be obtained immediately online.

Once an EIN is secured, employers must register with relevant state tax agencies for SUTA and, if applicable, state income tax withholding. Each state has its own registration process, often involving contacting the state’s department of labor or revenue. Some states may require new hire reporting. This step ensures the employer has the necessary accounts and identification numbers to properly report and remit all required federal and state payroll taxes.

Executing Payroll and Tax Filings

After completing the initial setup, executing payroll and fulfilling tax obligations involves procedural actions. For hourly paid nannies, accurately collecting and verifying hours worked is essential to calculate gross pay. This can be done through simple record-keeping, such as a calendar or a dedicated time-tracking application. Once hours are confirmed, the gross-to-net calculation involves subtracting pre-tax deductions and withholding the appropriate federal and state taxes.

Issuing paychecks or setting up direct deposits for the nanny should occur regularly, as agreed upon in the employment contract. Employers are responsible for remitting withheld employee taxes and their own employer tax contributions to the appropriate federal and state agencies. Federal tax deposits, including FICA and federal income tax withholdings, must be made electronically. The Electronic Federal Tax Payment System (EFTPS) is a free, secure, and convenient online service that allows employers to schedule and make federal tax payments.

The frequency of federal tax deposits depends on the employer’s total tax liability, generally following either a monthly or semi-weekly deposit schedule. The IRS notifies employers of their deposit schedule annually. FUTA tax deposits are typically required quarterly if the accumulated FUTA tax liability exceeds $500. If the liability is $500 or less, it can be carried forward to the next quarter or paid with the annual return if it remains below the threshold by year-end.

Annual filing requirements include preparing and distributing Form W-2, Wage and Tax Statement, to the nanny by January 31 of the following year. Form W-2 reports the nanny’s annual wages and the federal, state, and local taxes withheld. The nanny needs this form to file their personal income tax return. Employers must also file Form W-3, Transmittal of Wage and Tax Statements, along with Copy A of all W-2s, with the Social Security Administration (SSA) by the same deadline. The SSA offers online tools for employers to submit W-2s and W-3s.

Finally, household employers must complete and file Schedule H (Form 1040), Household Employment Taxes, with their annual federal income tax return. Schedule H reports Social Security, Medicare, FUTA, and any federal income taxes withheld for household employees. This form consolidates all household employment tax liabilities for the year. Additionally, employers are responsible for filing state unemployment and income tax forms, as applicable, adhering to each state’s specific deadlines and procedures. Utilizing a payroll service can streamline these procedural steps, ensuring accurate calculations, timely deposits, and proper form filings.