Understanding the Nanny Tax

Tax season is here! In this article, you’ll find a quick checklist of things you need to know about filing your nanny taxes the right way.

First, let’s be frank.  Although household employment tax laws certainly add an additional expense to your childcare budget, you really can’t afford not to comply with the law. Although some nannies may even ask to be paid “under the table”, a family that agrees to such an arrangement is taking significant legal and financial risks.  In long run, if you fail to pay your nanny legally, and get caught, it can cost you an average of $25,000 in fines and interest plus the taxes you owe.

Do I Owe the Nanny Tax?

According to the law, if a person works as a nanny in your home, that person is your household employee – not an independent contractor – no matter what you call them.  That’s because you as the employer control:

  • Your nanny’s schedule
  • The work that needs to be done, and
  • How the work should be performed

If you have a household employee and paid them more than $2,700* last year, federal law requires you to withhold and pay social security and Medicare taxes on your employee’s wages and pay federal unemployment tax (FUTA) as well.  Only you as the employer will pay FUTA, but both you and your employee share the social security and Medicare taxes (sometimes collectively called FICA) equally.

How Much Will I Owe?

Your employee’s share of FICA taxes is 6.2% of gross wages for social security, and 1.45% for Medicare. You withhold these taxes from your employee’s wages during the year and then match that amount when remitting these taxes to the IRS by April 15 of the following year, typically by completing a Schedule H and filing it along with your personal Form 1040.  You will use Schedule H to add your share of the FICA taxes to your total tax obligation, as well as to calculate the FUTA tax you owe.

How Do I Get Started?

New household employers have a few forms they need to get and complete to get started:

Form SS-4: This is an application for Employer Identification Number (EIN) which must be filed by all household employers. It gives you a specific tax number for dealing with the IRS and other relevant agencies.  You can also apply for an EIN online, and get one within minutes.  Be sure to select the option to register as a household employer; otherwise, you may be registered as a business employer.

Form W-4: Also known as Employee’s Withholding Allowance Certificate, your employee completes this form to provide you the filing status and other criteria you need to determine the correct amount of income tax to withhold from each pay. Household employers are not required to withhold federal income tax from an employee’s pay but may do so if both the employer and employee agree.

State Identification Numbers: You typically will need to register with your state revenue and/or unemployment department.  All states and unemployment (sometimes called workforce or labor) departments have websites where you can do this online.  You will need these state tax identification numbers to remit and pay state income, unemployment, and other related taxes, usually every quarter (but some states may permit an annual filing).

Form I-9: Also known as Employment Eligibility Verification, an I-9 form must be completed for every household employee. It is used to verify the identity of your employees as well as their employment eligibility to work in the United States.  You keep the completed I-9 for your records. Do not file it.

New Hire Report: By law, you are required to report any new employee you hire with your state within a certain frame of time since the hiring date.  Many states permit you to report online, but if not, you usually can obtain the appropriate form from your state government’s website.  It’s a simple form that takes little time to complete.

How Do I Report and Pay the Nanny Tax

So you have withheld the proper taxes from your employee all year.  Now what? Federal law requires you to prepare and file the following forms by April 15 of the following year:

Form W-2:  You need to provide this form to your employee by the 31st of January of the following year, and then file (mail) a copy with the Social Security Administration by the same date.

Form W-3 You need to send this form to the Social Security Administration, along with the government copies of all Forms W-2 for the employees from whom you withheld federal taxes the prior year.  Form W-3 acts like a cover sheet for all of your W-2s, and summarizes the wages and withholdings you paid and withheld from all employees last year.

Schedule H You will use this Schedule to report the household employment taxes you withheld and owe to the federal government. Schedule H itemizes and aggregates the total amount of taxes.  Typically you will attach Schedule H to your personal Form 1040, and the amount of nanny taxes you owe shown on Schedule H gets added to your total personal income tax bill.

Is Help Available?  Can I Do This Myself?

Although all this might seem overwhelming at first, in reality, it is pretty simple. A nanny payroll service might seem like a great idea, but the cost can quickly add a significant financial burden on your family budget.  With just a little bit of initial effort, you can learn how to do it yourself, and NannyPay software is here to help. For over two decades, NannyPay has been helping new household employers just like you comply with the Nanny Tax Laws and save money too!

NannyPay includes a complete Employer’s Guide which outlines the essential steps to setting up your DIY payroll system. After a little initial effort, you will be able to pay your household employee in minutes.

Although simple to use, NannyPay offers powerful and time-saving features for household employers, such as:  

  • Set-up Wizard walks you thru your initial payroll setup
  • Calculates all withholdings, including social security and Medicare taxes
  • Prints detailed pay stubs
  • Maintains all payroll records over multiple years
  • Generates year-end tax Forms W-2 and W-3, at no additional cost
  • Prepares signature-ready Schedule H, at no additional cost
  • Quarterly, annual and customizable wage reporting
  • Affordable annual subscription

You can download a fully-functional copy of NannyPay and try it for free for 30 days, no credit card information required.

*Updated February, 2024