Paying a Nanny: Is It Tax Deductible?

While direct tax deductibility for nanny wages is generally not allowed, families can often realize significant tax benefits through tax credits. Employing a nanny also involves specific tax responsibilities for the employer. Understanding these obligations and available credits is essential for navigating the tax implications of household employment.

Understanding Household Employee Tax Obligations

When an individual hires someone to perform duties within their home, such as a nanny, housekeeper, or caregiver, that person may be considered a household employee for tax purposes. This classification applies if the employer controls not only the work performed but also how it is done. This determines whether the employer is subject to “nanny taxes.”

Federal law mandates specific tax responsibilities for employers of household employees, including Social Security and Medicare taxes (FICA) and Federal Unemployment Tax Act (FUTA) taxes. For 2025, if cash wages paid to a single household employee reach $2,800 or more, the employer must pay FICA taxes. The FICA tax rate is 15.3% of wages, split evenly between the employer and employee, with each paying 7.65% (6.2% for Social Security and 1.45% for Medicare). The Social Security portion applies to earnings up to $176,100 for 2025, while Medicare taxes apply to all wages.

Beyond FICA, employers may also owe FUTA taxes if they pay cash wages totaling $1,000 or more in any calendar quarter to household employees. FUTA tax is an employer-only tax, not withheld from the employee’s wages. The FUTA tax rate is 6% on the first $7,000 of wages paid to each employee, though a credit for state unemployment taxes can reduce the effective federal rate to 0.6% in most states. State unemployment taxes may also apply, with rates and wage bases varying by state.

The Child and Dependent Care Credit

While nanny wages are not directly tax-deductible as personal expenses, families may claim a significant tax benefit through the Child and Dependent Care Credit. This credit directly reduces a taxpayer’s federal income tax liability. To qualify, care expenses must be for a qualifying individual, such as a dependent child under age 13 or a spouse or dependent of any age who is physically or mentally incapable of self-care and lives with the taxpayer for more than half the year.

The expenses must also be work-related, meaning they enable the taxpayer, and their spouse if filing jointly, to work or actively look for work. Qualified expenses can include nanny wages, as well as costs for daycare, babysitters, and after-school programs. For tax year 2024, the maximum expenses considered for the credit are $3,000 for one qualifying individual and $6,000 for two or more qualifying individuals.

The actual credit amount is a percentage of these qualifying expenses, ranging from 20% to 35%. This percentage depends on the taxpayer’s Adjusted Gross Income (AGI); higher AGIs result in a lower credit percentage. For example, if AGI exceeds $43,000, the credit percentage drops to 20%. The credit amount cannot exceed the lower of the taxpayer’s earned income or, for married couples, the lower of either spouse’s earned income.

Navigating Tax Filing and Reporting

Fulfilling household employment tax obligations and claiming the Child and Dependent Care Credit involves specific steps. For employer obligations, obtaining an Employer Identification Number (EIN) from the IRS is the first step, as it is required for tax reporting. Employers must issue Form W-2, Wage and Tax Statement, to each household employee by January 31 of the following year, reporting total wages paid and taxes withheld.

Household employment taxes, including FICA and FUTA, are reported annually on Schedule H (Form 1040). This schedule is filed with the employer’s personal income tax return, and the total tax due from Schedule H is included in the overall tax liability on Form 1040. While federal income tax withholding is not required for household employees, employers must withhold it if the employee requests it and they agree.

To claim the Child and Dependent Care Credit, taxpayers use Form 2441. This form requires information about the care provider, including their name, address, and taxpayer identification number. Taxpayers must also report the total amount paid for care and details about the qualifying individuals. The credit amount calculated on Form 2441 is carried to Form 1040, where it directly reduces the tax owed. Maintaining accurate records of wages paid, taxes withheld, and care expenses is essential for both employer obligations and claiming tax credits.