Is It Illegal to Issue a 1099 to a Nanny?

Issuing a Form 1099 to a nanny is not permissible because the work relationship establishes the nanny as a household employee, not an independent contractor. The classification is determined by tax authority rules that focus on who has the right to control the work being performed. Because families provide daily direction and oversight, the nanny functions as an employee, which dictates tax responsibilities where the employer must withhold and pay specific taxes.

Determining Worker Status

The Internal Revenue Service (IRS) uses specific criteria to differentiate between an employee and an independent contractor, which are grouped into three main categories. For nannies, the application of these tests leads to the conclusion that they are employees.

The first category is Behavioral Control, which examines whether the family has the right to direct and control how the nanny performs their duties. This includes setting the nanny’s work schedule, dictating specific tasks like meal preparation or educational activities, and providing instructions on how to care for the children. If the family determines the methods by which the work is accomplished, this points toward an employer-employee relationship.

Financial Control is the second category and looks at who directs the economic aspects of the job. The family provides all necessary supplies, such as food, toys, and equipment for the children. The nanny does not have a significant investment in the tools used to perform their job and is not operating as an independent business that can realize a profit or loss. They are paid a regular wage and are not offering their services to the general public in the same way a separate business would.

The final category is the Type of Relationship between the parties. This considers how the worker and family perceive their interaction. Factors include whether there is a written contract describing the relationship as employment and whether the services performed by the nanny are a key aspect of the family’s daily life, suggesting a degree of permanence. Because a nanny’s role is ongoing, it is not viewed as a temporary or standalone project, further solidifying their status as an employee.

Employer Obligations for a Household Employee

Once a nanny is correctly identified as a household employee, the family assumes specific tax obligations, commonly referred to as “nanny taxes.” These responsibilities are triggered when the nanny’s cash wages exceed certain thresholds set by the IRS. A primary obligation is the handling of Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare.

If a household employee earns $2,800 or more in a calendar year (for 2025), the employer is required to withhold the employee’s share of FICA taxes and pay the employer’s share. Both the employee and employer contribute 7.65% of the employee’s cash wages. The employer is responsible for remitting the total 15.3% to the government.

Another federal requirement is the Federal Unemployment Tax Act (FUTA) tax. This tax is paid solely by the employer and is not withheld from the employee’s wages. The FUTA obligation applies if the employer pays total cash wages of $1,000 or more to any household employees in any calendar quarter. The FUTA tax is calculated on the first $7,000 of wages paid to each employee.

Beyond federal duties, employers must also address state-level employment taxes. These include State Unemployment Tax (SUTA), which, like FUTA, is an employer-paid tax that provides benefits to workers who lose their jobs. Some states also mandate contributions to disability insurance or require employers to obtain workers’ compensation insurance, and these requirements vary by state.

Information and Forms for Payroll Setup

An employer must obtain an Employer Identification Number (EIN) from the IRS. An EIN is a unique nine-digit number that identifies the family as an employer, and it is required for filing federal employment tax returns. Families can apply for an EIN for free directly on the IRS website.

The employer must complete and retain Form I-9, Employment Eligibility Verification. This form is used to verify the identity and employment authorization of every new employee hired to work in the United States. The form itself is not filed with any government agency but must be kept on record by the employer.

The employer also needs the nanny to complete Form W-4, Employee’s Withholding Certificate. This form tells the employer how much federal income tax to withhold from the nanny’s paychecks. While withholding income tax is not required unless the employee requests it and the employer agrees, using Form W-4 is the standard method for determining the correct amount if withholding is to occur.

The Process of Paying Nanny Taxes

The primary mechanism for reporting and paying federal nanny taxes is Schedule H, Household Employment Taxes. This form is filed annually with the employer’s personal federal income tax return, such as Form 1040. Schedule H is used to calculate the total FICA and FUTA taxes owed for the year.

The total tax liability calculated on Schedule H is then added to the employer’s individual income tax obligation on their Form 1040. This amount is paid to the U.S. Treasury along with their personal taxes by the standard tax filing deadline, typically April 15th. To avoid a large tax bill at year-end, employers can make estimated tax payments throughout the year or increase their own income tax withholding from their job to cover the anticipated nanny taxes.

State tax obligations are handled separately and according to each state’s specific procedures. Most states require employers of household employees to register with the state’s workforce or tax agency. State unemployment taxes are paid quarterly, which involves filing a state-specific tax return and remitting the payment directly to the state agency by their established deadlines.

At the end of the year, the employer must provide the nanny with Form W-2, Wage and Tax Statement, by January 31st. This form details the total wages paid and the taxes withheld during the year. The employer must also file a copy of the Form W-2, along with Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration to report the employee’s earnings.

Consequences of Misclassification

Incorrectly classifying a nanny as an independent contractor and issuing a Form 1099 instead of a Form W-2 is considered tax evasion and can lead to financial penalties. An employer who is found to have misclassified their employee is liable for back taxes. This includes paying the employer’s share of Social Security and Medicare taxes that were never paid.

The employer can also be held responsible for the employee’s share of FICA taxes that were not withheld from their pay. On top of these back taxes, the IRS will assess interest and penalties on all unpaid amounts. These penalties can accumulate quickly, substantially increasing the total amount owed.

Penalties can be imposed for the failure to file the correct informational returns, such as Form W-2. The employer will also be liable for unpaid federal and state unemployment taxes. The financial risks associated with misclassification make it a costly mistake for families.