What Is Nanny Tax and Who Is Required to Pay It?

“Nanny tax” refers to the specific federal and state tax obligations that arise when an individual hires someone to perform work in their home. It is not a single tax but encompasses a combination of federal Social Security, Medicare, and unemployment taxes, along with potential state-level taxes. Understanding these requirements is important for compliance, as household employers are responsible for withholding and remitting applicable taxes.

Defining Household Employment

A household employee is an individual who performs work in or around a private residence where the employer controls not only what work is done but also how it is done. This means the employer dictates the hours, provides tools, and directs the method of completion. Common examples include nannies, housekeepers, caregivers, and private chefs. This relationship differs from hiring an independent contractor, such as a plumber or electrician, who controls their own work, sets their own hours, and offers services to multiple clients.

The obligation to pay federal Social Security and Medicare taxes, often called FICA taxes, is triggered when an employer pays a household employee cash wages of $2,800 or more in a calendar year. This threshold applies to wages paid to any single employee. However, wages paid to certain family members, such as a spouse, a child under the age of 21, or a parent, are exempt from FICA taxes.

A separate, lower threshold applies for federal unemployment tax (FUTA). Employers owe FUTA tax if they pay total cash wages of $1,000 or more to all household employees in any calendar quarter during the current or prior year. Wages paid to a spouse, a child under 21, or a parent are also exempt from FUTA. State unemployment insurance laws may have their own distinct thresholds and requirements.

Understanding Nanny Tax Components

Both the employer and employee contribute to FICA taxes. For 2025, the Social Security tax rate is 6.2% for the employer and 6.2% for the employee, applied to wages up to an annual wage base limit of $176,100. The Medicare tax rate is 1.45% for both the employer and the employee, with no wage base limit, meaning 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’s and employee’s shares to the Internal Revenue Service (IRS).

An additional Medicare tax of 0.9% applies to an employee’s wages exceeding $200,000 in a calendar year. Employers are required to withhold this additional tax once the threshold is met, but there is no corresponding employer match for this portion of the Medicare tax. The Federal Unemployment Tax (FUTA) is solely an employer-paid tax. The standard FUTA tax rate is 6.0% on the first $7,000 of each employee’s wages. However, employers can receive a credit of up to 5.4% against their FUTA tax liability if they pay their state unemployment taxes in full and on time, effectively reducing the net FUTA rate to 0.6%.

Federal income tax withholding is not mandatory for household employees, but an employer can choose to withhold it if the employee requests and the employer agrees. If federal income tax is withheld, it must be based on the employee’s Form W-4, Employee’s Withholding Certificate. States may impose their own requirements for income tax withholding, unemployment insurance, and other payroll taxes. Household employers should consult their state’s labor or revenue department for detailed information.

Employer Responsibilities and Preparations

Obtaining an Employer Identification Number (EIN) is a primary requirement, as this nine-digit number identifies the employer for tax purposes. An EIN can be applied for online directly through the IRS website, which provides immediate issuance.

Employers must provide a Form W-2, Wage and Tax Statement, to each household employee annually. This form reports the employee’s total wages paid, along with any Social Security, Medicare, or federal income taxes withheld. To accurately complete the W-2, employers need to maintain records, including the employee’s name, address, Social Security number, wages paid, dates of payment, and any taxes withheld. These records should be kept for at least four years after the relevant tax return is filed.

Understanding what constitutes taxable wages is also important; this includes cash payments made by check or money order. Employers are responsible for calculating both their own and the employee’s portions of FICA taxes based on the applicable wage thresholds and rates. Additionally, employers will need to register with their state’s tax agencies for state unemployment insurance and, if applicable, state income tax withholding.

Reporting and Paying Nanny Taxes

Federal household employment taxes are reported annually to the IRS using Schedule H, Household Employment Taxes. This form is filed along with the employer’s personal income tax return, Form 1040. Schedule H consolidates information such as total wages paid, FICA amounts, and FUTA amounts, summarizing the household employer’s tax obligations for the year.

To cover the federal household employment tax liability throughout the year, employers need to make estimated tax payments. These payments are made quarterly using Form 1040-ES, Estimated Tax for Individuals. Payments can be submitted through various methods, including IRS Direct Pay, the Electronic Federal Tax Payment System (EFTPS), or by mail. Any remaining tax balance is then paid when the employer files their annual Form 1040.

Employers also have responsibilities for state-level taxes. State unemployment and income taxes, if applicable, are reported and paid separately according to each state’s specific regulations and deadlines. Annually, employers must also file Form W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration, summarizing the information from all W-2 forms issued to their household employees.