Hiring household help: whether a nanny, caregiver, housekeeper, or personal assistant: brings valuable support to busy families. However, many employers remain unaware of the significant tax obligations that accompany these employment arrangements. The "nanny tax" represents a combination of federal and state taxes that household employers must manage, and failure to comply can result in substantial penalties, back taxes, and legal complications.
This comprehensive guide outlines the essential requirements, thresholds, and best practices that household employers should understand before bringing on domestic help.
Understanding the Nanny Tax
The nanny tax is not a single tax but rather a collection of federal and state employment taxes that apply when families hire household workers. Despite its name, these obligations extend far beyond nannies to include caregivers for elderly parents, housekeepers, private nurses, personal assistants, and other domestic employees who work in a private residence.
The distinction between an employee and an independent contractor is critical. If the household employer controls what work is done and how it is performed, the worker is classified as an employee: regardless of any informal agreements to the contrary. Misclassifying employees as independent contractors is a common mistake that can lead to significant IRS penalties.
2026 Threshold Requirements
For the 2026 tax year, household employers must comply with nanny tax requirements when paying any single household employee $3,000 or more in a calendar year. Additionally, federal unemployment insurance (FUTA) obligations apply when paying household employees a combined total of $1,000 or more in any calendar quarter.
These thresholds are adjusted periodically for inflation, so employers should verify current limits each tax year. Once the threshold is met, all wages paid to that employee during the year become subject to applicable taxes: not just the amount exceeding the threshold.
Taxes Involved in Household Employment
The nanny tax encompasses multiple tax categories, divided between amounts withheld from the employee's pay and amounts paid directly by the employer.
Taxes Withheld from the Employee
Household employers must withhold the following from their employee's wages:
- Social Security Tax: 6.2% of gross wages
- Medicare Tax: 1.45% of gross wages
- Federal Income Tax: Optional, but recommended if the employee requests it
- State Income Tax: Required in states with income tax, if applicable
Taxes Paid by the Employer
In addition to withholdings, employers must pay:
- Social Security Tax (Employer Portion): 6.2% of gross wages
- Medicare Tax (Employer Portion): 1.45% of gross wages
- Federal Unemployment Tax (FUTA): 6% on the first $7,000 of wages (reduced to 0.6% with state unemployment credit)
- State Unemployment Insurance: Rates vary by state
The combined FICA tax rate (Social Security and Medicare) totals 15.3% of gross wages: split evenly between the employer and employee at 7.65% each. Employers may choose to pay the employee's portion as a benefit, though this amount becomes additional taxable income for the employee.
Step-by-Step Employer Requirements
Household employers must complete several administrative tasks before employment begins and maintain ongoing compliance throughout the employment relationship.
Before Employment Begins
1. Obtain an Employer Identification Number (EIN)
Employers must secure a federal EIN from the IRS before hiring household help. This nine-digit number identifies the employer for tax purposes and is required for all tax filings. Applications can be submitted online through the IRS website at no cost.
2. Secure State Tax Identification Numbers
Most states require separate employer registration for state unemployment insurance and, where applicable, state income tax withholding. Registration requirements and timelines vary by state.
3. Collect Required Employee Documentation
Before the employee's first day of work, employers must obtain:
- Form I-9 (Employment Eligibility Verification): Confirms the employee's legal authorization to work in the United States
- Form W-4 (Employee's Withholding Certificate): Determines federal income tax withholding, if the employee elects to have it withheld
- State W-4 equivalent: Required in states with income tax
During Employment
1. Calculate and Track Payroll
Employers must accurately determine gross pay, calculate all required withholdings, and track employer tax obligations for each pay period. Maintaining detailed payroll records is essential for year-end reporting and potential audits.
2. Make Tax Deposits
Unlike business employers who deposit payroll taxes throughout the year, household employers typically report and pay nanny taxes annually with their personal tax return using Schedule H (Form 1040). However, employers may need to increase their quarterly estimated tax payments or adjust W-4 withholding at their regular job to avoid underpayment penalties.
3. File Quarterly State Returns
Many states require quarterly unemployment insurance filings, even when no taxes are due. Some states mandate monthly or annual filings instead. Employers should verify their state's specific requirements.
Year-End Requirements
1. Provide Form W-2
Employers must furnish their household employee with a completed Form W-2 by January 31 of the following year. This form reports total wages paid and all taxes withheld during the calendar year.
2. File Copy A with the Social Security Administration
Employers must submit Copy A of Form W-2, along with Form W-3 (Transmittal of Wage and Tax Statements), to the Social Security Administration by January 31.
3. Complete Schedule H
Household employment taxes are reported on Schedule H, which is filed with the employer's annual Form 1040. This schedule calculates total Social Security, Medicare, and federal unemployment taxes owed.
Special Situations: Nanny Shares and Multiple Employers
In a nanny share arrangement, where two or more families share a single caregiver, each family is considered a separate employer. Both families must:
- Obtain their own EIN
- Handle their own tax withholdings and payments
- Provide separate W-2 forms to the employee
- File their own Schedule H
The employee receives multiple W-2s and reports all income on their personal tax return. Families should coordinate schedules and payment arrangements but must maintain independent compliance with all tax requirements.
Tax Benefits for Household Employers
While nanny tax obligations represent a significant responsibility, household employers may qualify for valuable tax benefits that offset some of these costs.
Child and Dependent Care Credit
Families paying for childcare to enable work or job searching may claim the Child and Dependent Care Credit. This credit covers a percentage of qualifying childcare expenses, up to $3,000 for one qualifying individual or $6,000 for two or more. The credit percentage ranges from 20% to 35% based on adjusted gross income.
Dependent Care Flexible Spending Account (FSA)
Employees with access to a Dependent Care FSA through their employer can set aside up to $5,000 per year in pre-tax dollars to pay for eligible childcare expenses. This reduces taxable income and can provide significant savings for families with household childcare employees.
Employer-Provided Dependent Care Assistance
Some employers offer dependent care assistance programs that provide tax-free benefits for childcare expenses. Families should review their employee benefits packages for available options.
Common Compliance Mistakes to Avoid
Household employers frequently encounter compliance issues that can result in penalties and additional tax liability. The most common mistakes include:
- Misclassifying employees as independent contractors to avoid tax obligations
- Failing to obtain an EIN before making wage payments
- Not withholding or paying FICA taxes when thresholds are met
- Missing the January 31 deadline for providing W-2 forms
- Overlooking state unemployment insurance requirements
- Paying cash without maintaining records of wages and hours worked
- Failing to verify employment eligibility with Form I-9
Penalties for Non-Compliance
The IRS takes nanny tax compliance seriously. Penalties for non-compliance may include:
- Failure to file penalties for late Schedule H or W-2 submissions
- Failure to pay penalties for unpaid employment taxes
- Trust fund recovery penalties for willful failure to collect and pay withholding taxes
- Interest charges on unpaid tax balances
- State penalties for unemployment insurance violations
In severe cases, intentional non-compliance can result in criminal prosecution.
Professional Assistance Simplifies Compliance
Managing household employment taxes requires attention to detail and awareness of changing regulations. Many families find that working with a qualified tax professional reduces the administrative burden and ensures full compliance with federal and state requirements.
TIG Tax Services provides guidance to household employers navigating nanny tax obligations. From initial setup and EIN registration to year-end W-2 preparation and Schedule H filing, professional assistance helps families avoid costly mistakes and maximize available tax benefits.
For questions about household employment taxes or to schedule a consultation, visit TIG Tax Services to connect with certified tax professionals who understand the unique requirements facing household employers.