How to Pay a Nanny: A Look at Taxes and Payroll

Employing a nanny involves significant financial responsibilities beyond agreeing on a wage. Household employers must understand and adhere to federal and state tax laws, manage payroll, and maintain diligent records. Overlooking these obligations can lead to penalties, including back taxes and fines. This guide outlines the requirements for legally paying a household employee, covering steps from establishing employment to ongoing compliance.

Establishing Employment Foundations

The first step in legally employing a nanny is determining their employment status. Most nannies are employees, not independent contractors, under Internal Revenue Service (IRS) guidelines. The IRS evaluates the relationship based on behavioral control, financial control, and the type of relationship. If you control the work and how it is done, they are likely an employee. Misclassifying an employee can result in penalties for unpaid employment taxes.

Once employment status is clear, obtain an Employer Identification Number (EIN). An EIN is a unique nine-digit number assigned by the IRS, serving as your federal tax identification number. This number is essential for all household employment tax filings, including the employee’s W-2 and your annual Schedule H.

Applying for an EIN is straightforward, most commonly completed online through the IRS website for immediate receipt. While online application is fastest, you can also apply by faxing or mailing Form SS-4, though these methods take longer. When applying online, select “Sole Proprietor” as the legal structure and specify “Household Employer.” You will need to provide basic information such as your name, Social Security number, and the physical address where the work will be performed.

Calculating Wages and Taxes

Understanding financial obligations is essential before paying a household employee. Federal law, specifically the Fair Labor Standards Act (FLSA), mandates a minimum wage for all hours worked. Currently, the federal minimum wage is $7.25 per hour, though you must also check state and local laws, as these often require a higher wage.

Overtime rules under the FLSA require household employees to be paid at least one and a half times their regular rate for hours worked over 40 in a workweek. Live-in domestic service workers may be exempt from federal overtime requirements, but they must still receive at least the federal minimum wage. However, some states implement their own overtime rules for live-in employees, which may differ from federal guidelines.

Social Security and Medicare taxes, known as FICA taxes, are a significant payroll component. Both employer and employee contribute to these taxes. For 2025, each party pays 7.65% of the employee’s wages: 6.2% for Social Security and 1.45% for Medicare. The Social Security tax applies to wages up to an annual limit ($176,100 for 2025), while the Medicare tax applies to all wages without a limit. If you pay cash wages of $2,800 or more to any one household employee in 2025, you must withhold and pay these FICA taxes.

The Federal Unemployment Tax Act (FUTA) is another employer-only tax that funds unemployment benefits. The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee annually. Employers typically receive a credit of up to 5.4% for contributions paid to state unemployment funds, which can reduce the net federal FUTA tax rate to 0.6%.

Employers are also subject to State Unemployment Tax Act (SUTA) obligations. SUTA is an employer-funded tax that varies by state regarding rates and wage bases. You will need to register with your state’s unemployment agency to determine your specific SUTA rate.

Federal income tax withholding is not mandatory for household employees unless the employee requests it and you agree. If you agree to withhold federal income tax, the amount is based on the employee’s completed Form W-4. Many states also have income tax withholding requirements, based on state-specific forms.

Executing Payroll and Tax Filings

After establishing employment and calculating wages and taxes, the next step is executing payroll and remitting taxes. Establishing a consistent payroll cycle, such as weekly or bi-weekly, benefits both employer and employee. Payments can be made via direct deposit, check, or cash, but documenting all transactions is essential.

To determine the nanny’s net pay, deduct the employee’s share of FICA taxes and any agreed-upon federal or state income tax withholdings from their gross wages. This net amount is what the nanny receives. The employer’s share of FICA and FUTA taxes, along with withheld amounts, must then be remitted to the appropriate tax authorities.

Federal taxes, including FICA, FUTA, and any withheld federal income tax, are paid to the IRS. The Electronic Federal Tax Payment System (EFTPS) is a secure way to make these payments electronically, allowing you to schedule payments in advance. State unemployment and income taxes are remitted directly to respective state agencies. Processes for remitting state taxes vary, so consult your state’s specific guidelines. Many states offer online portals for employers to submit payments.

At the end of each calendar year, by January 31st of the following year, provide your nanny with Form W-2, Wage and Tax Statement. This form reports total wages paid and taxes withheld. You must also submit Copy A of Form W-2 along with Form W-3, Transmittal of Wage and Tax Statements, to the Social Security Administration.

Household employers also have a year-end filing requirement with the IRS. File Schedule H, Household Employment Taxes, with your personal income tax return (Form 1040). Schedule H summarizes the FICA, FUTA, and any federal income taxes related to your household employee for the tax year. The total household employment taxes from Schedule H are then reported on your Form 1040. If you are not required to file a Form 1040, you would file Schedule H by itself.

Maintaining Ongoing Compliance

Ongoing compliance involves administrative and legal considerations beyond regular payroll and tax filings. Accurate and organized record-keeping is fundamental. Retain detailed records for at least four years after the relevant tax return is filed or the tax is paid, whichever is later. These records should include hours worked, gross pay, net pay, tax withholdings, tax payments, W-2 forms, and your EIN confirmation. Maintaining employment agreements and other relevant documents is also advisable.

Many states require household employers to carry workers’ compensation insurance. This insurance provides benefits to employees for job-related injuries or illnesses. Requirements vary significantly by state, often depending on factors like the number of employees or total wages paid. Check your state’s labor department or workers’ compensation board to understand specific mandates and how to obtain coverage. Some states may have monopolistic funds, meaning coverage must be purchased directly from the state.

Establishing a written employment agreement or contract with your nanny is a recommended practice, even if not legally mandated. This document outlines employment terms, including duties, pay rates, work schedule, overtime policies, paid time off, and termination clauses. A clear agreement helps prevent misunderstandings and provides a reference point.

States can impose additional laws specific to domestic employment, such as requirements for paid sick leave or specific onboarding procedures. Consulting your state’s labor department website or a qualified payroll professional helps ensure adherence to all applicable state-specific regulations.