How to Pay a Nanny Legally and Handle Taxes

Paying a nanny requires careful attention to federal and state tax and labor laws. Understanding these obligations ensures compliance and helps avoid potential penalties.

Understanding Your Employer Responsibilities

A person hired to work in your home, such as a nanny, is generally considered your employee, not an independent contractor. This classification is determined by the control you have over the work performed. This distinction dictates your tax and legal responsibilities as an employer. Misclassifying an employee can lead to significant financial penalties from tax authorities.

As a household employer, you are subject to the Fair Labor Standards Act (FLSA), which mandates federal minimum wage and overtime pay. You are also responsible for Social Security and Medicare taxes, known as FICA taxes. For 2025, FICA taxes apply if you pay a household employee $2,800 or more in cash wages during the calendar year.

Both the employer and the employee contribute to FICA taxes. The Social Security tax rate is 6.2% for both parties on wages up to $176,100 for 2025. The Medicare tax rate is 1.45% for both parties, applied to all wages with no wage base limit. This means the combined FICA tax rate for both employer and employee is 15.3% (7.65% for each party) on applicable wages.

Household employers also owe Federal Unemployment Tax (FUTA). This employer-only tax applies if you pay $1,000 or more in cash wages to household employees in any calendar quarter. The FUTA tax rate is 6.0% on the first $7,000 of an employee’s wages. Employers typically receive a credit of up to 5.4% for timely paid state unemployment taxes, reducing the effective FUTA rate to 0.6%.

State unemployment taxes (SUTA) are an employer-only tax, with rates and wage bases varying by state. Most states also have their own wage and hour laws that may differ from federal standards, such as requiring overtime after fewer than 40 hours or having a higher minimum wage. Understanding these state-specific requirements is important for compliance, as they can impact payroll costs and reporting obligations.

Setting Up for Payroll and Tax Withholding

To pay your nanny legally, obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This nine-digit number serves as your federal tax ID and is required for reporting employment taxes. The easiest way to obtain an EIN is by applying online through the IRS website, which typically provides the number immediately upon completion.

After securing your EIN, register with state tax agencies. This registration is necessary for state unemployment tax (SUTA) and, if applicable, state income tax withholding. Specific agencies and registration processes vary by state, but commonly involve the state’s labor, workforce, or revenue department. Completing these state registrations is a prerequisite for accurate state tax payments and filings.

Deciding on a payroll method is another setup step. You can manage payroll manually, calculating wages and taxes yourself, or utilize a payroll service specializing in household employment. Payroll services simplify the process by handling calculations, withholdings, and tax filings. Manual payroll requires a hands-on approach and a thorough understanding of tax rules.

If you opt for manual payroll, collect a completed Form W-4, Employee’s Withholding Certificate, from your nanny. This form provides information about the employee’s tax situation, allowing you to determine the amount of federal income tax to withhold from their wages. The W-4 helps ensure the amount of tax is remitted to the IRS throughout the year.

Consider any state-specific withholding forms, as some states require separate forms for state income tax withholding. These forms serve a similar purpose to the federal W-4, guiding the employer in calculating state income tax withholdings based on the employee’s declarations. Proper completion and retention of both federal and state withholding forms are important for accurate payroll processing.

Processing Payments and Filing Taxes

Once employer accounts are established, paying your nanny involves calculating gross pay and withholding taxes. This calculation includes deducting the employee’s share of FICA taxes, as well as any federal, state, or local income taxes based on the information provided on their Form W-4 and state forms. The remaining amount constitutes the nanny’s net pay.

Making federal tax deposits is an ongoing obligation. You will remit withheld federal income taxes, the employee’s share of FICA, and your matching employer share of FICA and FUTA taxes to the IRS. The Electronic Federal Tax Payment System (EFTPS) is a free online service provided by the U.S. Department of the Treasury for making these federal tax payments. Enrollment in EFTPS is required and can take several business days to process.

The frequency of federal tax deposits depends on your total tax liability. Most household employers with lower tax liabilities can pay annually with their personal income tax return (Form 1040) by filing Schedule H. If your tax liability exceeds certain thresholds, you may be required to make monthly or semi-weekly deposits. Consult IRS Publication 926 for specific deposit schedules and thresholds.

In addition to deposits, you are responsible for filing quarterly federal tax returns. While some larger employers use Form 941 or Form 944 for small employers, most household employers report these taxes annually on Schedule H, Household Employment Taxes, which is filed with their personal Form 1040. This annual filing method simplifies compliance.

State tax obligations also require attention. You will file quarterly state unemployment tax returns and, if applicable, state income tax withholding returns. Due dates and specific forms for these state filings vary by jurisdiction. Adhering to these state deadlines is important for compliance and to avoid penalties.

Year-End Reporting and Other Employer Obligations

At the end of each tax year, by January 31st of the following year, you are responsible for preparing and issuing Form W-2, Wage and Tax Statement, to your nanny. This form reports the wages paid and taxes withheld. You must also send Copy A of Form W-2, along with Form W-3, Transmittal of Wage and Tax Statements, to the Social Security Administration (SSA) by the same January 31st deadline.

Following the issuance of Form W-2, prepare and file Schedule H, Household Employment Taxes, with your personal federal income tax return (Form 1040). This form summarizes your household employment taxes for the year, including FICA and FUTA, and any federal income tax withheld. Schedule H is due by the tax filing deadline, April 15th, or with any approved extension for your Form 1040.

Another consideration for household employers is workers’ compensation insurance. While federal law does not mandate this coverage for household employees, many states require it, often based on thresholds for hours worked or wages paid. Obtaining workers’ compensation insurance protects you from financial liability if your nanny sustains a work-related injury or illness. Research your state’s specific requirements.

Maintaining accurate records for all payroll and tax-related documents is important. The IRS recommends retaining household employment tax records for at least four years after the tax return is filed or the tax is paid, whichever is later. These records should include employee information, wages paid, hours worked, taxes withheld, and copies of all filed forms. Record-keeping supports accurate reporting and can be important during an audit.