How to Properly Pay Your Nanny and Handle Taxes

Properly compensating a nanny involves understanding various legal and financial obligations. Families employing a nanny must navigate a landscape of employment laws and tax requirements to ensure compliance. This responsibility extends beyond merely agreeing on a wage; it encompasses determining employment status, adhering to wage and hour regulations, and managing applicable payroll taxes. Fulfilling these duties correctly helps families avoid potential penalties and fosters a professional working relationship with their household employee.

Establishing the Nanny’s Employment Status

Determining whether your nanny is an employee or an independent contractor is a key step in compliant household employment. The IRS provides specific guidelines, known as common law rules, to make this distinction. These rules examine the relationship across three areas: behavioral control, financial control, and the type of relationship.

Behavioral control refers to the household’s right to direct or control the nanny’s work and how it is done. Providing instructions on when, where, or how to perform tasks, or offering training, suggests an employer-employee relationship.

Financial control examines the household’s right to direct or control the financial aspects of the nanny’s job. Factors include unreimbursed business expenses, investment in tools or facilities, and payment methods. If the household provides tools, equipment, and reimburses expenses, it indicates an employment relationship.

The type of relationship considers how the household and nanny perceive their interaction. This involves written contracts, employee benefits (like paid time off or insurance), and the relationship’s permanency. Most nannies are employees because the household typically controls the work, provides specific instructions, and often has a long-term arrangement.

Understanding Wage and Hour Rules

Once a nanny is established as an employee, households must adhere to federal and state wage and hour laws. The Fair Labor Standards Act (FLSA) sets the federal minimum wage and overtime pay requirements for domestic service workers, including nannies. The federal minimum wage is $7.25 per hour, although many states have higher minimum wage rates that would apply.

For non-live-in nannies, overtime pay is generally required at one-and-a-half times their regular hourly rate for all hours worked over 40 in a workweek. Accurate records of hours worked are essential for proper calculation.

Live-in nannies, those residing in the employer’s home, are generally exempt from federal overtime pay requirements. However, they must still receive at least the federal minimum wage for all hours worked. While federal law does not mandate overtime for live-in domestic workers, some states may require it.

Beyond federal and state minimum wage and overtime, households should also be aware of other compensation considerations. Paid time off (PTO) and sick leave are not federally mandated for private employers, but many states and localities have laws requiring them. These benefits, when applicable, affect the overall compensation package and should be clearly outlined in the employment agreement.

Navigating Household Employment Taxes

Employing a nanny involves various federal and state tax obligations for the household. These include Social Security and Medicare taxes, collectively known as FICA taxes, as well as federal and state unemployment taxes. Understanding these taxes and the division of responsibility between the employer and employee is important.

FICA taxes are shared between the employer and employee. For 2025, the Social Security tax rate is 6.2% for both the employer and the employee, totaling 12.4%. This tax applies to wages up to an annual limit, which is $176,100 for 2025. The Medicare tax rate is 1.45% for both the employer and employee, totaling 2.9%, and there is no wage base limit for Medicare tax; it applies to all covered wages. Employers are responsible for withholding the employee’s share of FICA taxes from their wages and remitting both the employer and employee portions.

Households must also consider federal unemployment tax (FUTA), which is an employer-paid tax. The FUTA tax rate is 6.0% on the first $7,000 of each employee’s wages, though employers can often receive a credit of up to 5.4% for timely state unemployment tax payments, reducing the net FUTA tax rate to 0.6%.

State Unemployment Tax Act (SUTA) taxes also apply, and these are typically employer-paid, though a few states require employee contributions. SUTA rates and the taxable wage base vary by state, often depending on factors like the employer’s history of unemployment claims. Households may also choose to withhold federal income tax from their nanny’s wages, though this is not federally mandated for household employers. If income tax withholding is desired, the nanny must complete a Form W-4, Employee’s Withholding Certificate, to provide necessary information for accurate withholding calculations.

Setting Up and Running Nanny Payroll

Managing nanny payroll involves several procedural steps to ensure all tax and wage obligations are met. The first step for a household employer is to obtain an Employer Identification Number (EIN) from the IRS. This nine-digit number is required for reporting and remitting household employment taxes. An EIN can be applied for online through the IRS website.

After obtaining an EIN, the next step involves necessary employment forms. The nanny should complete Form I-9, Employment Eligibility Verification, to confirm their authorization to work in the United States. They should also fill out Form W-4, Employee’s Withholding Certificate, if the household agrees to withhold federal income tax from their wages. This form provides information such as marital status and adjustments to help determine the correct amount of tax to withhold.

Regular payment of wages and tax remittances are ongoing responsibilities. Wages should be paid according to the agreed-upon schedule, and any applicable FICA taxes and withheld federal income taxes must be remitted to the IRS. These payments are generally made quarterly through estimated tax payments, or they can be paid with the household’s income tax return. For federal tax deposits, electronic funds transfer (EFT) is typically required.

At the end of the year, the household employer must provide the nanny with Form W-2, Wage and Tax Statement, by January 31 of the following year. This form reports the nanny’s annual wages and the taxes withheld. The household employer then files Schedule H (Form 1040), Household Employment Taxes, with their personal income tax return (Form 1040). Schedule H reports the Social Security, Medicare, and FUTA taxes owed for the household employee, along with any federal income tax withheld.

Maintaining detailed records of wages paid, hours worked, and taxes withheld is important for at least four years. Households can manage payroll themselves or utilize specialized household payroll services, which can handle calculations, withholdings, and tax filings for a fee, typically ranging from a few hundred dollars to over a thousand annually.