Nanny Taxes & Payroll Explained: A 2026 Guide for Household Employers
When you hire a nanny, you become a household employer with real tax obligations. This guide walks you through everything: what you owe, how to file, and whether a payroll service is worth the cost.
Your Tax Obligations at a Glance
If you pay a household employee $2,700 or more in 2026, you owe these taxes:
| Tax | Rate | Who Pays | Annual Cost (on $40K salary) |
|---|---|---|---|
| Social Security | 6.2% | Employee + employer (each) | $2,480 employer share |
| Medicare | 1.45% | Employee + employer (each) | $580 employer share |
| FUTA (federal unemployment) | 0.6% on first $7,000 | Employer only | $42 |
| State unemployment (SUTA) | 1–5% (varies by state) | Employer only | $200–$1,000 |
| Workers' compensation | Varies by state | Employer only | $300–$800 |
| Total employer cost | $3,600–$4,900 |
That's roughly 9–12% on top of your nanny's gross salary. Factor this in when calculating total nanny costs.
Step-by-Step: Setting Up Nanny Payroll
- Get an EIN — Apply for a federal Employer Identification Number at IRS.gov. It's free and instant online.
- Have your nanny complete Form I-9 and W-4 — I-9 verifies work eligibility; W-4 determines federal income tax withholding (optional but recommended).
- Register with your state — Most states require you to register as a household employer for unemployment insurance. Check your state labor department.
- Set a pay schedule — Biweekly is most common. Some states mandate minimum pay frequency.
- Calculate withholdings each pay period — Deduct the employee's share of FICA (7.65%) and any elected income tax withholding.
- Keep records — Track hours, gross pay, withholdings, and net pay. Issue pay stubs each period.
What Taxes You Must Withhold
You're required to withhold from your nanny's paycheck:
- Social Security: 6.2% of gross wages
- Medicare: 1.45% of gross wages
These two combined (7.65%) are the employee's share of FICA. You then match this with your own 7.65%.
Federal income tax withholding is optional — your nanny can choose whether to have it withheld. If not withheld, they'll owe it when filing their personal return. State income tax withholding rules vary by state.
What Taxes You Pay as the Employer
FICA Match (7.65%)
You pay the employer half of Social Security (6.2%) and Medicare (1.45%) — this comes out of your pocket, not the nanny's paycheck.
FUTA (Federal Unemployment Tax)
The base rate is 6.0% on the first $7,000 of wages. However, you receive a 5.4% credit if you also pay state unemployment taxes, making the effective rate just 0.6% — about $42/year.
State Unemployment Tax (SUTA)
Rates and wage bases vary by state. Most new household employers pay 1–3% on the first $7,000–$15,000 in wages. Some states (like New York and California) have higher wage bases.
Workers' Compensation Insurance
Most states require household employers to carry workers' compensation insurance. Even where not legally required, it's strongly recommended to protect yourself from liability.
- Typical cost: $300–$800/year for a full-time nanny
- Where to buy: Your homeowner's insurance carrier, state fund, or a standalone policy
- What it covers: Medical expenses and lost wages if your nanny is injured on the job
States that require workers' comp for household employees include California, New York, New Jersey, Illinois, and many others. Check your state's requirements.
Filing Requirements: Schedule H & W-2
Quarterly Estimated Payments
You can either increase your own income tax withholding (via W-4 with your employer) or make quarterly estimated tax payments (Form 1040-ES) to cover household employment taxes throughout the year.
Year-End Filings
- W-2 to nanny: Due by January 31. Report total wages and all withholdings.
- W-3 + Copy A to SSA: Due by January 31. Transmit W-2 data to Social Security Administration.
- Schedule H: Attach to your Form 1040 by April 15. Reports all household employment taxes owed.
- State filings: Quarterly unemployment reports and annual wage reports — deadlines vary by state.
DIY vs. Payroll Service: Which Should You Choose?
| Feature | DIY | Payroll Service ($40–$75/mo) |
|---|---|---|
| Tax calculation | You calculate manually | Automatic each pay period |
| Pay stubs | Spreadsheet/template | Professional stubs generated |
| Tax deposits | You file quarterly | Filed and deposited for you |
| W-2 preparation | You prepare and mail | Prepared and filed |
| Schedule H | You fill out | Prepared for your return |
| State registrations | You handle | Handled for you |
| Year-end cost | $0 (your time) | $480–$900/year |
| Penalty risk | Higher (manual errors) | Lower (guaranteed accuracy) |
Our recommendation: A payroll service pays for itself in time saved and penalty avoidance. The $40–$75/month is a fraction of what you're already spending on childcare, and IRS penalties for late or incorrect filings can easily exceed $1,000.
Common Mistakes That Trigger IRS Problems
- Paying cash under the table — The most common and riskiest mistake. If caught, you owe back taxes, penalties (up to 100% of unpaid tax), and interest. Your nanny also loses Social Security credits and unemployment eligibility.
- Misclassifying as a 1099 contractor — Nannies are W-2 employees, period. The IRS defines household employees as workers whose schedule, location, and methods you control. Issuing a 1099 doesn't change the legal classification.
- Not filing Schedule H — Even if your nanny leaves mid-year, you still owe taxes on wages already paid. The IRS cross-references W-2s with 1040 filings.
- Forgetting state unemployment registration — States penalize unregistered employers. Some states discover you when your nanny files for unemployment after leaving.
- Skipping workers' comp — In states that require it, operating without coverage exposes you to personal liability for any workplace injuries.
Frequently Asked Questions
Do I have to pay taxes on a nanny?
Yes. If you pay a household employee $2,700 or more in a calendar year (2026 threshold), you are required to withhold and pay Social Security and Medicare taxes (FICA). You must also pay federal and state unemployment taxes and file a W-2.
Can I pay my nanny as a 1099 independent contractor?
No. The IRS considers nannies household employees, not independent contractors, because you control when, where, and how they work. Misclassifying a nanny as a 1099 contractor can result in back taxes, penalties, and interest.
How much do nanny payroll services cost?
Nanny payroll services typically cost $40–$75 per month ($480–$900/year). They handle tax calculations, pay stub generation, quarterly filings, year-end W-2s, and Schedule H preparation. The cost is often worth it to avoid IRS penalties.
What is Schedule H and when do I file it?
Schedule H (Household Employment Taxes) is the IRS form you attach to your personal tax return (Form 1040) to report household employee taxes. You file it annually by April 15. It covers Social Security, Medicare, and federal unemployment taxes.
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