Nanny Tax: Household Employee Rules Explained

If you pay someone to care for your child, clean your home, or look after an aging parent inside your house, you may have become an employer without realizing it. The nanny tax is the set of federal payroll tax obligations that kick in when you hire a household employee, and getting it wrong can trigger back taxes, penalties, and a messy correction the following April. This guide walks you through who counts as a household employee, the wage threshold that triggers the rules, and exactly what you need to file.

The nanny tax is the common name for the Social Security, Medicare, and federal unemployment taxes a family owes when it pays a household employee above an annual wage threshold set each year by the IRS. The employer reports these taxes on Schedule H with their personal Form 1040 and issues the worker a W-2.

What the nanny tax actually is

Despite the name, the nanny tax is not limited to nannies. It applies to any household worker you control, including housekeepers, senior caregivers, private nurses, gardeners, and babysitters who work regularly in or around your home. “Household employer” is the formal IRS term, and once your payments to one of these workers cross the annual threshold, you are responsible for Social Security and Medicare (FICA) taxes, and potentially federal unemployment tax (FUTA). The nanny tax is reported through your personal income tax return rather than a separate business filing, which surprises many first-time household employers.

Because these are employment taxes tied to wages, treating them correctly from day one is far easier than unwinding a mistake later. For broader context on employer obligations, see our resources on payroll & employment tax.

Household employee vs. independent contractor

The single most important classification question is whether your worker is an employee or an independent contractor. The IRS looks at control: if you decide what work is done and how it is done, the worker is almost always your employee. Nannies, housekeepers, and in-home caregivers nearly always fall into the employee category because you set their schedule, dictate their duties, and provide the workplace.

Independent contractors, by contrast, control their own methods, offer services to the public, and supply their own tools. A self-employed cleaning company you hire periodically is typically a contractor; a person you bring into your home on a set schedule is not. Misclassifying an employee as a contractor to avoid the nanny tax is one of the costliest errors a family can make, because the IRS can reclassify the worker and assess back taxes plus penalties.

The wage threshold that triggers it

The nanny tax is triggered by an annual cash-wage threshold that the IRS adjusts most years for inflation. When you pay a single household employee cash wages at or above that yearly amount, you must withhold and pay Social Security and Medicare taxes on those wages. There is also a separate quarterly wage figure that determines whether you owe federal unemployment tax.

Because these dollar amounts change from year to year, do not rely on a figure you saw in an old article. Always confirm the current-year threshold for the tax year in question directly on IRS.gov before you run payroll or file. For the 2025 tax year, check the figure published in IRS Publication 926 (Household Employer’s Tax Guide), and verify again for any later year, since the number is updated regularly.

Social Security, Medicare, and FUTA

Once you cross the threshold, three federal taxes can apply. Social Security and Medicare (collectively FICA) are split between you and your employee: each side pays a set percentage of wages, and you remit the combined amount. You may withhold the employee’s share from their pay or choose to cover it yourself, but you still owe the employer half regardless.

Federal unemployment tax (FUTA) is paid entirely by you, the employer, on the first portion of wages each year, and many states add their own state unemployment tax. FUTA generally applies once you pay total household cash wages above the quarterly trigger amount. Keep careful records of gross wages each pay period so these calculations stay accurate at year-end.

Getting an EIN and registering with your state

Before you can report household employment taxes, you need a federal Employer Identification Number (EIN). You can apply for one free of charge on IRS.gov, and you should use the EIN rather than your Social Security number on payroll documents and the W-2. Do not reuse a business EIN for household employment unless your tax advisor confirms it is appropriate.

Most states also require you to register as a household employer for state unemployment insurance and, in some cases, state income tax withholding. State rules vary widely, so check with your state’s labor and revenue agencies. Some states also mandate workers’ compensation coverage for household employees, which is separate from the nanny tax but equally important.

Withholding from your employee’s pay

You are not federally required to withhold income tax from a household employee’s wages unless both you and the worker agree to it. Many families do agree, because it spares the employee a large tax bill in April. If you withhold, have the employee complete a Form W-4 so you know how much to take out.

You should, however, withhold the employee’s share of Social Security and Medicare unless you have chosen to pay it yourself. Track every dollar of cash wages, withheld FICA, and any income tax withheld, since these figures feed directly into the W-2 and Schedule H. Thoughtful withholding is also a useful piece of household tax planning, smoothing the cash-flow impact across the year.

Reporting on Schedule H

The nanny tax is reported on Schedule H, which you attach to your personal Form 1040. Schedule H totals the Social Security, Medicare, FUTA, and any withheld income taxes you owe for the year, and that amount is added to your individual tax liability. Because the tax is settled with your 1040, you should account for it when making estimated tax payments throughout the year to avoid an underpayment penalty.

If you wait until you file to think about the nanny tax, you may face a large balance due plus interest. Increasing your quarterly estimated payments, or adjusting withholding at your own job, helps cover the liability as it accrues.

Year-end W-2 and the dependent-care tax breaks

By the federal deadline in January, you must furnish your household employee a Form W-2 and file Copy A with the Social Security Administration, along with a Form W-3 transmittal. The W-2 reports wages paid and taxes withheld for the prior year, and your employee needs it to file their own return.

On the brighter side, paying a caregiver above board can unlock tax benefits for you. If you pay for care so you can work, you may qualify for the Child and Dependent Care Credit, and a workplace Dependent Care FSA can let you set aside pre-tax dollars for eligible care. These breaks generally require that you report the caregiver’s identifying information, which is only possible when you have handled the nanny tax correctly.

Step-by-step: handling the nanny tax

1. Determine whether your worker is an employee (almost always) or a genuine independent contractor.
2. Confirm the current-year cash-wage threshold on IRS.gov for the relevant tax year.
3. Apply for a federal EIN and register as an employer with your state.
4. Verify your employee’s work eligibility with Form I-9 and collect a W-4 if you will withhold income tax.
5. Run payroll each period, calculating and recording FICA and any withholding.
6. Make estimated tax payments to cover the liability as it builds during the year.
7. Issue the W-2 and file with the SSA by the January deadline.
8. File Schedule H with your Form 1040 and claim any dependent-care tax breaks you qualify for.

Mistakes to avoid

• Misclassifying the worker as a contractor. This is the most common and most expensive error.
• Paying entirely in cash with no records. Off-the-books pay exposes you to penalties and leaves your employee without Social Security credits or unemployment protection.
• Ignoring state requirements. State unemployment registration and workers’ compensation are easy to overlook.
• Forgetting estimated payments. Saving the entire liability for April can trigger underpayment penalties.
• Using an outdated wage threshold. The trigger amount changes; always re-check it for the current tax year.

Frequently asked questions

Who has to pay the nanny tax?

Any family that pays a household employee cash wages at or above the IRS annual threshold for the tax year must pay the nanny tax. This includes employers of nannies, housekeepers, senior caregivers, and similar in-home workers you direct and control.

Is a part-time babysitter a household employee?

It depends on control and total pay. A regular sitter whose schedule and duties you set is typically an employee, while an occasional teenage babysitter usually is not. If your total cash wages to that person stay below the annual threshold, FICA obligations may not be triggered, but confirm the current figure on IRS.gov.

What happens if I pay my nanny under the table?

Paying off the books can result in back taxes, interest, and penalties if discovered, and it denies your employee Social Security, Medicare, and unemployment benefits. It can also complicate claiming the Child and Dependent Care Credit, which requires reporting the caregiver’s details.

Do I withhold income tax from my household employee?

Federal income tax withholding is optional and only happens if you and your employee both agree to it. You generally must, however, handle the employee’s share of Social Security and Medicare taxes unless you elect to pay those yourself.

How do I report the nanny tax to the IRS?

You report it on Schedule H, attached to your personal Form 1040, and you issue your employee a W-2 each year. See the IRS resources below for the household employer rules and Schedule H instructions.

Book a free consultation with Tranzesta

Hiring help at home should make your life easier, not bury you in payroll paperwork. Tranzesta’s US and UK tax specialists can set up your EIN and state registrations, run compliant household payroll, prepare Schedule H and W-2s, and make sure you capture every dependent-care tax break you are entitled to. Book a free consultation and let us take the nanny tax off your plate.

For authoritative details, review the IRS Household Employer’s Tax Guide (Publication 926) and the About Schedule H (Form 1040) page.

Disclaimer: This article is for general informational purposes only and does not constitute tax, legal, or accounting advice. Tax thresholds, rates, and rules change and vary by jurisdiction; always confirm the current figures for the relevant tax year on IRS.gov and consult a qualified professional about your specific situation.