Nanny tax, explained without the jargon

Do you owe nanny tax?

“Nanny tax” is the payroll tax you owe as a household employer. You owe it if two things are true.

Your nanny is your employee. A nanny who works in your home, on your schedule, under your direction, is generally your employee, not a 1099 contractor. That’s true whether they work full-time or part-time. Calling them a contractor doesn’t change it. If an agency employs the nanny and controls how the work is done, the agency is the employer instead.

You pay them enough. For 2025, the threshold was $2,800 in cash wages in the year. It rises most years, so check IRS Publication 926 for the current figure. Once you reach it, Social Security and Medicare apply to all of that year’s cash wages, not just the amount over the line.

A few workers are exempt from Social Security and Medicare, such as your spouse, your own child under 21, or a worker under 18 for whom household work isn’t their main job, like a student. Publication 926 has the full list.

In a nanny share, each family is usually a separate employer for the wages it pays. That means each family applies the threshold, runs payroll and files on its own.

What you pay

Social Security and Medicare. 6.2% for Social Security plus 1.45% for Medicare, or 7.65% in all. You pay this as the employer. You also withhold the same 7.65% from your nanny’s pay, and send both halves to the IRS.

Some families pay the nanny’s share themselves instead of withholding it. That’s allowed, but the amount counts as extra wages for the nanny’s income tax.

Federal unemployment tax (FUTA). This applies if you pay $1,000 or more in cash wages to household employees in any calendar quarter of this year or last year. The rate is 6.0% on the first $7,000 of each employee’s wages. Most employers get a credit for paying state unemployment tax, which usually brings the rate down to 0.6%, or $42 per employee a year. FUTA is yours alone. Don’t withhold it from the nanny’s pay.

Federal income tax. You don’t have to withhold it. You only do so if you and your nanny both agree. If you do, ask them to fill out Form W-4.

State rules

Every state is different. Common items include state unemployment tax, which most household employers pay, and state income tax withholding. Some states also require disability or paid family leave insurance, or workers’ compensation insurance. Most require new-hire reporting, where you tell the state you’ve hired someone within a set number of days.

Your state’s labor or revenue department website will list what applies to household employers where you live.

How to pay it, step by step

1. Get an EIN. You need an employer identification number. Apply online with the IRS or file Form SS-4. You can’t use your Social Security number for this.

2. Register with your state. Usually for state unemployment tax, and for state income tax withholding if it applies.

3. Run payroll. Each payday, withhold the nanny’s 7.65%, plus any income tax you agreed on. Keep records of hours worked and pay.

4. Cover your share during the year. Federal nanny tax is paid with your own tax return. To avoid an underpayment penalty, raise the withholding at your own job or make estimated tax payments.

5. File at year end. Give your nanny a Form W-2 by January 31. File Copy A with the Social Security Administration, with Form W-3, by the same date. Then file Schedule H with your Form 1040.

Keep your payroll records for at least four years. If that sounds like a lot, nanny payroll services can do most of it for a fee. They calculate each paycheck, file state forms, and prepare the W-2.

A worked example: a $40,000-a-year nanny

Employer Social Security: 6.2% of $40,000 = $2,480.

Employer Medicare: 1.45% of $40,000 = $580.

Federal unemployment: 0.6% of the first $7,000 = $42.

State unemployment (example): 3% of the first $10,000 = $300.

Your total employer taxes: about $3,402 for the year, on top of $40,000 in wages.

Your nanny’s share is another $3,060 (7.65% of $40,000), withheld from their pay. That leaves them $36,940 before any income tax. You send their $3,060 to the IRS along with your own share.

Why paying legally is worth it

For your nanny. They earn Social Security credits toward retirement and disability benefits. They can claim unemployment if the job ends. And they have a record of income for renting a home or getting a loan.

For you. You can use a dependent care FSA if your employer offers one, and you may qualify for the child and dependent care credit. Both ask for your care provider’s name and taxpayer ID, which is hard to give if you pay off the books. Paying off the books also risks back taxes, penalties and interest later.