How to Properly Set Up Your Nanny Payroll
Master compliant payroll for your household employee. This guide simplifies the essential steps for accurate tax management and legal obligation fulfillment.
Hiring a nanny often classifies a family as a household employer. This classification comes with specific legal obligations regarding payroll and taxes, commonly referred to as the “nanny tax.” Understanding these requirements is important for compliance and to avoid penalties. Proper setup ensures both employer and employee meet tax responsibilities, providing benefits like Social Security and Medicare coverage for the worker.
Initial Setup and Information Gathering
Household employers must obtain an Employer Identification Number (EIN) from the IRS. This unique nine-digit number serves as your tax ID for reporting household employment taxes. You can apply for an EIN online through the IRS website, by mail, or by fax; online application is typically fastest.
Form W-4, Employee’s Withholding Certificate, is crucial for determining federal income tax withholding. Your nanny will complete this form, indicating their filing status, dependents, and any additional withholding they desire.
Form I-9, Employment Eligibility Verification, is also vital. You must complete and retain this form for your records; it is not submitted to any government agency. State requirements vary; you may need to register as an employer with your state’s labor or unemployment agency.
Calculating Wages and Taxes
Calculating your nanny’s wages and associated taxes involves several components. Begin by determining gross pay, the total amount earned before deductions. This can be based on an hourly rate, a fixed salary, or include agreed-upon benefits.
Federal payroll taxes include Social Security and Medicare taxes (FICA). For 2025, the Social Security tax rate is 6.2% for both employer and employee, applied to wages up to a maximum of $176,100. The Medicare tax rate is 1.45% for both employer and employee, with no wage base limit. As the employer, you withhold the employee’s share from their pay and contribute your matching share.
Federal income tax withholding is determined by the nanny’s Form W-4 and IRS tax withholding tables. This amount is withheld from the nanny’s gross pay. Federal Unemployment Tax (FUTA) is an employer-only tax. For 2025, the FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee annually. Employers typically receive a credit for state unemployment taxes paid, reducing the effective FUTA rate to 0.6% in most cases.
State payroll taxes include state income tax withholding and State Unemployment Insurance (SUI). State income tax withholding applies in states with an income tax, calculated using state-specific forms and tables. SUI is generally an employer-only tax, though some states may require employee contributions. SUI rates and wage bases vary significantly by state and depend on your employer history.
Paying Payroll Taxes
After calculating wages and taxes, remit payroll taxes to the appropriate government agencies. For federal taxes, the Electronic Federal Tax Payment System (EFTPS) is the primary method for making payments. You must enroll in EFTPS online; receiving your Personal Identification Number (PIN) by mail typically takes five to seven business days.
After enrollment, you can schedule payments online or by phone. Federal payroll tax payment schedules vary based on tax liability. If your tax liability is substantial, semi-weekly deposits may be required.
State tax payment schedules and methods differ widely by jurisdiction. Most states offer online portals for remitting state income tax withholding and SUI. Consult your state’s tax agency website for instructions on payment due dates and accepted methods. Many states have electronic payment requirements, similar to the federal EFTPS.
Annual Reporting
At the end of the tax year, household employers must complete several annual reporting forms. Form W-2, Wage and Tax Statement, summarizes your nanny’s annual wages and all taxes withheld. This form is used by your nanny to file their personal income tax return.
Provide copies of Form W-2 to your nanny by January 31st of the following year. Copies must also be submitted to the Social Security Administration (SSA) by the same deadline, typically via their Business Services Online portal or mail.
Household employers use Schedule H (Form 1040), Household Employment Taxes, to report FICA, FUTA, and federal income tax withholding paid throughout the year. This form is filed with your personal income tax return, Form 1040, integrating your household employment tax obligations with your individual tax liability.
Many states also require annual reconciliation forms for state income tax withholding and SUI. Check your state’s specific deadlines and submission methods for these annual reports. Maintain thorough payroll records, including pay stubs, tax forms, and payment confirmations, for at least four years for potential audits.