To pay a nanny legally, you register as a household employer with the IRS, verify your nanny’s eligibility to work in the U.S., withhold and match Social Security and Medicare taxes once wages cross the annual threshold, pay federal and state unemployment tax, follow federal and state wage-and-hour rules, and file a W-2 and Schedule H at year-end. For 2026, Social Security and Medicare obligations begin once you pay a household employee $3,000 or more in cash wages during the calendar year.1Social Security Administration. Employment Coverage Thresholds Each piece is manageable once you know the order.
Your Nanny Is an Employee
The IRS treats household workers as employees whenever you control what work gets done and how. If you set the schedule, decide the tasks, and provide the supplies, the person working in your home is your employee, whether full-time or part-time and whether you found them through an agency or on your own.2Internal Revenue Service. Hiring Household Employees
Calling a nanny an independent contractor to sidestep payroll is one of the more expensive mistakes a family can make. If the IRS reclassifies the arrangement, you owe the back taxes plus penalties and interest. Get this right at the start and everything else follows.
Before the First Day: EIN and I-9
Two things need to happen before your nanny starts.
First, apply for an Employer Identification Number. This nine-digit federal tax ID is required before you can file employment taxes or issue a W-2. Applying online at the IRS website generates the number immediately; Form SS-4 by fax or mail takes days to weeks.3Internal Revenue Service. About Form SS-4, Application for Employer Identification Number (EIN)
Second, complete Form I-9 to verify your nanny’s identity and legal right to work. The exemption for “casual domestic employment” covers only sporadic workers, not a nanny you employ on a set schedule.4U.S. Citizenship and Immigration Services. Domestic Workers Your nanny fills out Section 1 no later than the first day of work. You review their identity and work-authorization documents and complete Section 2 within three business days of that first day.5U.S. Citizenship and Immigration Services. Instructions for Form I-9, Employment Eligibility Verification You cannot tell your nanny which specific documents to present. Retain the completed form while employment continues, and then for either three years after the hire date or one year after employment ends, whichever is later.
The Taxes You Owe
Social Security and Medicare (FICA)
Once you cross the $3,000 threshold for 2026, both you and your nanny owe FICA on those wages. Social Security is 6.2% each and Medicare is 1.45% each, so you withhold 7.65% from every paycheck and match it with 7.65% of your own money.6Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide Social Security tax applies only to the first $184,500 of wages in 2026.7Social Security Administration. Contribution and Benefit Base Medicare has no wage cap, and an additional 0.9% Medicare tax applies to wages over $200,000 in a calendar year.
Federal Unemployment Tax (FUTA)
If you pay $1,000 or more in total cash wages to household employees in any calendar quarter of 2025 or 2026, you owe FUTA on the first $7,000 you pay each employee during the year.8Office of the Law Revision Counsel. 26 USC 3306 – Definitions The FUTA rate is 6%, but employers who pay state unemployment taxes on time receive a credit of up to 5.4%, dropping the effective federal rate to 0.6%.9Internal Revenue Service. Topic No. 759, Form 940 – Employers Annual Federal Unemployment (FUTA) Tax Return FUTA is entirely your cost. Nothing comes out of your nanny’s pay.
Federal Income Tax Withholding
You are not required to withhold federal income tax from your nanny’s wages. If your nanny asks you to withhold and you agree, have them complete a Form W-4 so you can calculate the right amount.10Internal Revenue Service. Topic No. 756, Employment Taxes for Household Employees Many nannies prefer this because it prevents a large April tax bill. Otherwise, they handle their own estimated payments.
State Taxes
Most states impose their own unemployment insurance tax on household employers, with wage bases and rates that vary widely. Some states also require you to withhold state income tax or contribute to disability or paid family leave programs. Check with your state’s labor or revenue department, because a missed state obligation generates penalties independently of anything at the federal level.
Minimum Wage, Overtime, and the Live-In Rule
The Fair Labor Standards Act covers nannies. Your nanny must earn at least the federal minimum wage of $7.25 per hour for every hour worked, or the higher state or local minimum where you live.11U.S. Department of Labor. Fact Sheet 79D – Hours Worked Applicable to Domestic Service Employment Under the Fair Labor Standards Act Market rates run well above the federal floor almost everywhere, but the legal minimum still governs overtime math.
For any workweek over 40 hours, you owe overtime at one and one-half times the nanny’s regular hourly rate.12U.S. Department of Labor. Fact Sheet 79B – Live-in Domestic Service Workers Under the Fair Labor Standards Act The main federal exception is for live-in nannies. If your nanny resides in your household, federal law exempts them from overtime, though minimum wage still applies to every hour worked.13Office of the Law Revision Counsel. 29 USC 213 – Exemptions Some states override this and require overtime for live-in workers, so don’t assume the federal rule ends the analysis.
Keep daily records of start times, end times, and breaks. This protects you in any wage dispute and is what makes overtime calculations defensible.
Running Payroll Each Pay Period
Each pay period, calculate gross wages from the hours worked (or the agreed salary equivalent), subtract the employee’s 7.65% FICA share and any voluntary income tax withholding, and pay the net. Check, direct deposit, or cash all work, though a paper trail simplifies recordkeeping.
Many families use a payroll service that specializes in household employment. These services handle the math, generate pay stubs, make tax deposits, and file year-end forms for a monthly fee. If you prefer to handle payroll yourself, software designed for household employers walks through each step.
Year-End Filings and Deadlines
Two filings close out the year.
Give your nanny a Form W-2 showing total wages and taxes withheld by January 31 following the tax year.14Social Security Administration. Deadline Dates to File W-2s For 2026 wages, transmit copies of the W-2 and Form W-3 to the Social Security Administration by February 1, 2027.6Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
File Schedule H with your personal Form 1040. Schedule H reports all household employment taxes for the year: FICA, FUTA, and any federal income tax you withheld. It’s due with your return by April 15, 2027 for the 2026 tax year, and a 1040 extension covers Schedule H as well.6Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
Household employers usually cover the annual tax bill through estimated payments or by increasing withholding at their own day job. Estimated tax due dates for 2026 are April 15, June 15, and September 15, 2026, and January 15, 2027.6Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide Waiting until April to pay everything at once can trigger an underpayment penalty.
Tax Breaks That Offset the Cost
Two federal benefits reduce the effective cost of paying a nanny legally. Paying under the table forfeits both.
Dependent Care FSA
If your workplace offers a dependent care FSA, you can set aside up to $7,500 per household in pre-tax dollars for childcare in 2026, or $3,750 if married filing separately.15Office of the Law Revision Counsel. 26 USC 129 – Dependent Care Assistance Programs Because the money is excluded from taxable income, savings scale with your marginal rate. A family in the 24% federal bracket saves roughly $1,800 in federal income tax alone, plus FICA savings on top. This is often the single largest financial benefit of putting your nanny on the books.
Child and Dependent Care Credit
Without an FSA, or for expenses beyond what the FSA covers, you may qualify for the Child and Dependent Care Tax Credit. It applies to up to $3,000 in qualifying expenses for one child or $6,000 for two or more, with the credit percentage running from 20% to 35% depending on adjusted gross income. Expenses already excluded through an FSA reduce the dollar limits for this credit, so most families use one or the other rather than both.
State-Specific Obligations to Check
More than 20 states require household employers to carry workers’ compensation insurance for domestic employees, with eligibility thresholds tied to hours per week or quarterly earnings in some states and other measures in others. Even where coverage is optional, a policy protects you from personal liability if your nanny is hurt on the job. Basic household workers’ comp typically costs a few hundred dollars per year.
A growing number of states have also enacted domestic worker laws that go beyond federal protections, including mandatory rest breaks, paid sick leave, and protection from harassment. Scope and detail vary, so check your state’s labor department for what applies to you.
Recordkeeping
Hold on to all employment tax records for at least four years after the tax is due or paid, whichever is later.16Internal Revenue Service. Recordkeeping That includes Schedule H copies, W-2s, payroll records, and any W-4 you have on file. Keep the hours-worked and wages-paid logs too. If the IRS raises a question three years from now, these records are your defense.
What Non-Compliance Costs
The IRS charges a failure-to-pay penalty of 0.5% of unpaid taxes for each month or partial month they remain unpaid, capped at 25%, plus interest running from the original due date.17Internal Revenue Service. Failure to Pay Penalty Failing to file Schedule H carries its own penalty, and late W-2s add per-form fines. Your state can pursue you separately for unpaid unemployment contributions. Background checks for security clearances and professional licenses have surfaced nanny tax issues years after the fact. Paying legally from day one costs more upfront and closes off a risk that tends to appear at the worst possible time.