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

The “nanny tax” is a commonly used term referring to the tax obligations that arise when an individual employs someone to perform household work. It is not a single, distinct tax but rather a combination of federal and, often, state employment taxes. These taxes serve to fund essential programs like Social Security, Medicare, and unemployment benefits, providing a safety net for workers. Understanding these obligations is crucial for anyone hiring household help, as compliance ensures proper contributions to these systems.

Classifying Your Household Employee

Determining whether a worker is a household employee or an independent contractor is the foundational step in understanding tax responsibilities. The Internal Revenue Service (IRS) uses a “control test” to make this distinction. A worker is generally considered an employee if the person for whom they work controls not only the outcome of the work but also how and when it is performed. This control over the worker’s methods and schedule is the primary indicator of an employer-employee relationship.

Common examples of household employees include nannies, housekeepers, caregivers, private chefs, and yard workers. Independent contractors, such as plumbers or electricians, control their own work, use their own tools, and offer services to the general public.

Once a worker is classified as a household employee, specific wage thresholds trigger tax obligations. For 2025, if cash wages paid to any single household employee reach $2,800 or more in the year, Social Security and Medicare taxes apply. Employers also incur Federal Unemployment Tax (FUTA) obligations if they pay total cash wages of $1,000 or more to household employees in any calendar quarter of the current or preceding year.

Understanding Federal Tax Responsibilities

Federal taxes for household employees primarily consist of Social Security and Medicare taxes (FICA) and Federal Unemployment Tax (FUTA). FICA taxes fund Social Security (old-age, survivors, and disability insurance) and Medicare (hospital insurance). Both the employer and the employee contribute to FICA taxes, each typically paying 7.65% of the employee’s wages. This 7.65% is composed of a 6.2% Social Security tax and a 1.45% Medicare tax.

For 2025, the Social Security tax applies to wages up to an annual limit of $176,100, while there is no wage limit for Medicare tax. The employer is responsible for withholding the employee’s share of FICA taxes from their wages and paying both the employee’s and employer’s shares to the IRS.

The Federal Unemployment Tax (FUTA) is an employer-paid tax. For 2025, the FUTA tax rate is 6.0% on the first $7,000 of cash wages paid to each employee annually. Unlike FICA, FUTA is solely an employer responsibility and is not withheld from the employee’s wages. Employers receive a credit of up to 5.4% against their FUTA tax liability for timely contributions to state unemployment funds, which can reduce the effective federal rate to 0.6%.

Employers are not required to withhold federal income tax from a household employee’s wages. However, if an employee requests federal income tax withholding and the employer agrees, the employer must do so. In such cases, the employee would need to complete a Form W-4, Employee’s Withholding Certificate, to provide the necessary information for accurate withholding.

Meeting State Tax Requirements

Beyond federal obligations, employers of household employees face state-level tax requirements. The most common state tax is State Unemployment Insurance (SUI). SUI taxes fund unemployment benefits for workers who lose their jobs through no fault of their own. Most states fund SUI entirely through employer contributions, although a few states may require employee contributions.

State tax requirements, including wage thresholds, tax rates, and reporting frequencies, vary considerably by jurisdiction. A business with employees working in different states, for instance, would need to pay SUI tax to each state where employees work. It is important for employers to consult their specific state’s labor or tax department to ascertain precise requirements, as state laws can include unique surcharges or different wage bases for SUI. Some states may also impose other specific taxes, such as disability insurance or paid family leave contributions.

Payroll and Reporting Procedures

Complying with household employment tax laws involves several practical steps, beginning with obtaining an Employer Identification Number (EIN). An EIN is a unique nine-digit number assigned by the IRS and is required for employers to report taxes. An EIN can be obtained online through the IRS website.

Employers must compute gross wages, determine the employee’s share of FICA to withhold, and calculate their own share of FICA and FUTA taxes. Federal tax payments, including FICA and FUTA, can be made through the Electronic Federal Tax Payment System (EFTPS), a free service provided by the U.S. Department of the Treasury. State tax payments follow their own specific methods, which vary by state.

Annual reporting is a crucial part of the compliance process. Household employers use Schedule H (Form 1040), Household Employment Taxes, to report and pay federal household employment taxes with their annual income tax return. This form consolidates the FICA and FUTA taxes owed. Employers are also required to prepare Form W-2, Wage and Tax Statement, for each employee, detailing wages paid and taxes withheld.

Form W-3, Transmittal of Wage and Tax Statements, summarizes W-2 data and is filed with the Social Security Administration (SSA). These forms are due to the SSA by January 31 of the year following the tax year, and employees must receive their W-2s by the same date. State-specific reporting forms and deadlines also apply for state unemployment taxes and other state-mandated contributions.