Is Hiring a Nanny Tax Deductible? A Tax Credit Explainer

Hiring a nanny can provide invaluable support for families, yet the financial implications extend beyond their wages. While many believe nanny costs are “tax deductible,” these expenses are generally not a direct tax deduction. Instead, they may qualify for the Child and Dependent Care Credit. Understanding this distinction is important, as is recognizing the separate obligations that arise when becoming a household employer, which include various tax responsibilities.

The Child and Dependent Care Credit

The Child and Dependent Care Credit offers a tax benefit to individuals who pay for the care of a qualifying person to enable them to work or actively seek employment. To be eligible, the care must be for a child under 13, or for a spouse or dependent who is physically or mentally incapable of self-care and lives with the taxpayer for more than half the year. The credit cannot be claimed if the care provider is a dependent of the taxpayer or a child of the taxpayer under 19.

Qualifying expenses include amounts paid for care provided both inside and outside the home. These expenses must be directly related to the taxpayer’s ability to work or look for work. Expenses incurred for personal leisure, such as vacations, do not qualify.

The credit amount is determined by a percentage of qualifying expenses, ranging from 20% to 35%. For the 2024 tax year, maximum expenses are $3,000 for one qualifying person and $6,000 for two or more. The specific percentage depends on the taxpayer’s Adjusted Gross Income (AGI). Taxpayers with an AGI of $15,000 or less receive the maximum 35% credit, while those with an AGI of $43,000 or more receive a 20% credit.

To claim this credit, taxpayers must gather specific information about their care provider. This includes the provider’s full name, address, and Taxpayer Identification Number (TIN), typically a Social Security Number (SSN) or Employer Identification Number (EIN). The total amount paid to the care provider during the tax year must also be documented.

Responsibilities as a Household Employer

An individual becomes a household employer for tax purposes if, in 2024, they paid cash wages of $2,700 or more to any single household employee, or $1,000 or more to all household employees in any calendar quarter during the current or preceding year. A household employee is generally someone for whom the employer controls both what work is done and how it is performed, with nannies being a common example. Certain family members, such as a spouse, a child under 21, or a parent, are typically excluded from these household employment tax rules.

Household employers must obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This number is necessary for reporting and remitting household employment taxes. An EIN can be obtained through an online application.

Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare, apply to household employment. Both the employer and the employee contribute to FICA taxes, each paying 7.65% of the employee’s cash wages. The employer is responsible for withholding the employee’s share from their wages and remitting both portions to the IRS. For 2024, if an employee is paid $2,700 or more in cash wages, FICA taxes apply up to the annual Social Security wage base of $168,600, while Medicare taxes have no wage limit.

Federal Unemployment Tax Act (FUTA) taxes are another employer responsibility. FUTA taxes apply if total cash wages of $1,000 or more were paid to all household employees in any calendar quarter of the current or preceding year. The FUTA tax rate is 6.0% on the first $7,000 of cash wages paid to each employee annually. Employers can receive a credit of up to 5.4% against their FUTA tax liability for timely payments made to state unemployment funds. State unemployment taxes may also apply, and employers should consult their specific state’s requirements.

Household employers must issue Form W-2, Wage and Tax Statement, to each employee if FICA wages meet the annual threshold or if federal income tax was withheld. Form W-2 must be provided to the employee by January 31 of the following year, with a copy, along with Form W-3, Transmittal of Wage and Tax Statements, submitted to the Social Security Administration by the same deadline.

Reporting and Paying Household Employment Taxes

Household employment taxes, including Social Security, Medicare, and Federal Unemployment (FUTA) taxes, are primarily reported on Schedule H (Form 1040), Household Employment Taxes. Schedule H integrates with the taxpayer’s main federal income tax return, Form 1040.

Employers have several options for paying these taxes throughout the year. One method is to increase federal income tax withholding from their own wages. Alternatively, employers can make quarterly estimated tax payments using Form 1040-ES, Estimated Tax for Individuals.

Estimated tax payments are due on April 15, June 15, September 15, and January 15 of the following year. Schedule H is filed along with Form 1040 by the annual tax deadline, usually April 15 of the subsequent year.

Claiming the Child and Dependent Care Credit

Claiming the Child and Dependent Care Credit involves completing Form 2441, Child and Dependent Care Expenses.

On Form 2441, taxpayers will input the details of their care provider, including their name, address, and Taxpayer Identification Number. The total amount of qualifying expenses paid during the year is also entered. Form 2441 is then filed directly with the taxpayer’s main federal income tax return, Form 1040.