Hiring a Nanny? Here’s What You Need to Know About the ‘Nanny Tax’

As part of a dual-income household, my physician husband and I quickly found out we needed additional help running our home and assisting with our four children (yes, four kids under the age of 13!). From laundry to sports practices and even grocery shopping, we needed to focus on our businesses and quality time with our kids.

For many physicians and other high-income professionals, hiring a nanny or family assistant is a practical way to keep the household running and to maintain some level of work-life balance. But once you hire a household employee, you don’t just become a parent with help; in the eyes of the IRS, you become an employer. That means you need to deal with what's commonly referred to as the “nanny tax.”

It might be tempting to avoid nanny taxes altogether and hope the IRS won’t come knocking. However, failing to pay nanny taxes can result in back taxes, interest, and penalties. You could even face legal liability for employment violations. Dealing with nanny taxes might seem like a pain, but voluntary compliance now is far less costly than forced compliance later.

Today, I'll break down the nanny tax, your responsibilities, and how to comply with IRS rules for paying a household employee so you feel comfortable navigating this new role as an employer.

What Is the Nanny Tax?

The “nanny tax” refers to the obligation to withhold and pay employment taxes for household employees. If you pay a nanny, housekeeper, or other domestic worker more than $2,800 in 2025 (or $2,900 in 2026), the IRS considers you an employer subject to specific payroll tax rules.

These taxes include the following:

Social Security and Medicare (FICA)

You may withhold 7.65% from your employee’s wages and match that amount as the employer. If you are extra generous, you can pay the employee’s share of FICA taxes.

Federal Unemployment Tax (FUTA)

You must pay FUTA tax if you pay your worker $1,000 or more in wages in any calendar quarter. The FUTA tax rate is 6% on the first $7,000 in wages. However, if you pay state unemployment tax, you may qualify for a lower rate.

State Unemployment Insurance (SUI)

Rules vary by state, but employers must register for SUI and file quarterly reports in most states. This is even the case in states without income tax, such as Tennessee and Florida.

You may also withhold federal and state income taxes from your household employee’s wages, but this is optional. I’ve discovered that most childcare employees will want withholding taken out on their behalf.

Who Qualifies as a Household Employee?

If you control what work is done and how it is done, the person is a household employee, not an independent contractor. This applies even if the nanny sets their own hours or works part-time.

There are some exceptions, though. If your nanny is under 18 and childcare isn’t their principal occupation, you don’t have to withhold or pay FICA taxes on their behalf. For example, suppose you hire a high school student to provide part-time babysitting services after school. In that case, there’s no FICA tax liability even if their wages are more than the annual household employment tax threshold.

You also don’t need to pay Social Security, Medicare taxes, or federal unemployment taxes on wages paid to your spouse, your own child if they’re under the age of 21, or your parents.

More information here:

Exploring Taxes with Alexis Gallati

How to Set Up Payroll for Your Household Employee or Nanny

Once you hire a household employee, you must set up and manage their payroll. There are two routes you can go: “Do it Yourself” or hire a payroll agency.

Nanny Payroll Agencies

There are several niche “nanny” payroll agencies that you can easily review on the internet and hire. While costs vary depending on the service (averaging about $40-$70 a month) and how many household employees you have, it’s often worth the cost to avoid time-consuming paperwork and errors and to stay compliant with ever-changing payroll laws. These agencies provide several services on your behalf, including but not limited to:

1. Register you with the IRS and the state to employ a nanny
2. Calculate all the necessary federal and state taxes and withholdings
3. Keep you compliant with your state labor laws concerning household employees
4. Send you a cash requirements report each pay period, so you have enough money in your account to run payroll
5. Pay your nanny through direct deposit or a check each pay period
6. File your federal and state payroll quarterly/annual forms and issue a W-2 to your nanny at the end of the year
7. Make the federal and state tax and withholding payments

This is a good option if you don’t feel comfortable handling the payroll tax process yourself or if you want to remove yourself from the administrative burden.

Do It Yourself Payroll

However, if you want to save money and have the capability to handle your payroll obligations yourself, here’s a basic step-by-step process to get started:

#1 Verify the Employee’s Eligibility

When you hire a household employee, you must verify that they’re eligible to work in the United States. You do this by having them complete a Form I-9. Keep this form on file with copies of any documents they provide to prove their eligibility—such as a copy of their driver’s license or passport, a permanent resident card or alien registration receipt card, a Social Security card, or a birth certificate.

Your household employee should have a Social Security number or, if not a US citizen, be authorized to work in the country by the Department of Homeland Security.

#2 Get a Household Employer EIN

Apply for a separate Employer Identification Number (EIN) from the IRS for household employment. Don’t use your business EIN. You need to separate your personal household employee responsibilities from your business finances.

You can apply for an EIN online at IRS.gov.

#3 Register with Your State

Each state has its own requirements for unemployment insurance and state income tax withholding. For example, California and New York require you to register with the state’s employment department.

Keep in mind, your state may have additional responsibilities beyond payroll and tax obligations. For example, some states require household employers to carry a workers' compensation policy, even if they have only one household employee. You may need to pay the nanny at least your state or local minimum wage, which may be higher than the federal minimum wage of $7.25 per hour. You may also need to pay the nanny time and a half if they work more than 40 hours in a week. It’s a good idea to discuss the requirements with a tax advisor or attorney familiar with your state's requirements.

#4 Calculate Withholdings

Determine whether you will withhold your nanny’s share of Social Security and Medicare taxes or pay them out of your own pocket. Either way, you must also pay the employer’s share, FUTA, and potentially SUI.

You can also withhold federal and state income tax if your household employee requests it. You’ll need to get a completed Form W-4 from the nanny to determine how much to withhold.

You send both the employee withholdings and your employer portion to the IRS on a quarterly schedule by making estimated tax payments. These quarterly payments alleviate the burden of owing a big tax bill when you file your income tax return.

Send the payment with Form 1040-ES or make an estimated payment online using IRS Direct Pay. These payments are due on April 15, June 15, September 15, and January 15 of the following year. If any dates fall on a weekend or holiday, the deadline shifts to the next business day.

Another option is to have additional federal income taxes withheld from your own salary.

#5 File the Correct Forms

As a household employer, you don’t need to file quarterly employment tax returns the way businesses do. Instead, you file Schedule H (Form 1040) to report household employment taxes.

You’ll also need to send the employee a Form W-2 by January 31 of the following tax year and file a copy of their W-2 and Form W-3 with the IRS. You may also need to file state-specific forms, depending on your state’s requirements.

More information here:

8 Tips for Employing a Nanny the Right Way

The Childcare Options for a High-Income Family

Tax Breaks for Nanny Expenses

Many self-employed physicians wonder whether they can deduct their nanny’s wages as a business expense. After all, you hire a nanny so you can work. Unfortunately, you can’t deduct your nanny’s wages as a business expense unless it falls under a rare business use case, which we’ll discuss below. The IRS considers childcare—whether from a nanny or daycare—as a personal expense, so it’s not deductible.

However, two tax benefits may apply:

Dependent Care Flexible Spending Account (FSA)

If you or your spouse’s employer offers a Dependent Care FSA, aka a Dependent Care Assistance Program (DCAP), you can contribute up to $5,000 per year pre-tax (per family, not per parent) to pay for qualifying expenses, including nanny wages. This is different than an FSA that’s used for healthcare. With a Dependent Care FSA, you can still contribute to an HSA in the same year.

To qualify, the nanny must provide care for a child under age 13 or for a spouse or relative who is physically or mentally incapable of self-care and lives in your home.

Child and Dependent Care Tax Credit

The Child and Dependent Care Tax Credit is a nonrefundable credit that allows you to claim a percentage of up to $3,000 in expenses for one child or $6,000 for two or more children.

The full credit is 35% of eligible expenses. However, the percentage goes down as your income rises. Most physicians only qualify for the minimum credit, which is 20% of eligible expenses, because their income is over $43,000 [2025].

Special Situations Where a Business Deduction Might Apply

In very limited circumstances, you may be able to deduct nanny wages as a business expense, but this likely won’t apply to most physicians.

Taxpayers who operate a licensed home daycare and hire a nanny to help care for the enrolled children (not just their own) can deduct the nanny as a legitimate business expense. However, these situations are rare because you may not want to start another business that comes with additional responsibilities and liabilities.

Another way to deduct a portion of your nanny’s wages is to have them assist you in your business with business job duties. For example, if your nanny assists with administrative responsibilities while your child is in school or napping, then a portion of their salary can be deductible. It is generally recommended to pay them separately from their nanny pay for their business work to avoid mingling personal and business activities and to treat them like any other employee of your business with an employment agreement separate from their nanny agreement. As long as your nanny feels comfortable with this arrangement, it may be a win-win.

If you think you might qualify, it’s a good idea to discuss your situation with a tax professional. They can help you document the reasons you qualify and avoid misclassification or audit risk.

More information here:

25 Sick Days in 5 Months: How Daycare Germs Are Costing Our Family

Don’t Let Nanny Taxes Deter You from Getting the Help You Need

Hiring a nanny means complying with federal and state tax laws—including withholding and paying employment taxes, registering with the appropriate government agencies, and filing accurate forms. But don’t let the red tape deter you if flexible childcare could make your life more manageable.

You might choose to handle these obligations on your own. Just make sure you recognize the time commitment and attention to detail required to do it right. Even small errors can lead to penalties or missed opportunities for tax savings.

Using a household payroll service and working with a tax professional who understands your situation can save you hours of administrative work, help you avoid costly mistakes, and get clarity around the tax benefits for which you might qualify. If you’re navigating household employees for the first time, tapping into that expertise can bring peace of mind and protect your financial well-being.

Even as a tax professional, I use a nanny payroll service for my family nanny. Since I pay my nanny every week, I don’t want the administrative hassle of making sure she is paid on time, filing the required forms, and making the tax payments to the IRS and state. I also know that payroll tax penalties can be steep (even worse than income tax penalties!), and if anything were to go wrong, I can rely on the payroll service company to take responsibility. For me, my time is better utilized with my job, family, and hobbies.

Whether you take the DIY route or hire outside help, understanding your nanny tax obligations is the first step toward ensuring your household support system doesn’t become another source of stress.

Have you employed a nanny? How did you ensure you were paying them and paying taxes the correct way? What other advice would you give?