What is the Nanny Tax?

**Nanny tax** is an informal term for the federal and state employment taxes that US households must pay when they hire domestic workers -- including nannies, babysitters, housekeepers, private nurses, gardeners, and other household employees -- and pay them $2,700 or more in a calendar year (2024 threshold). The name comes from its most common application -- hiring a nanny -- but the obligation applies to any household employer who meets the wage threshold. Under US tax law, a domestic worker you hire directly and direct how to work is your employee, not an independent contractor. This means you are legally responsible for withholding and remitting payroll taxes on their behalf, including Social Security (6.2 percent), Medicare (1.45 percent), and the employer's matching share of those taxes. You are also responsible for federal unemployment tax (FUTA) and possibly state unemployment tax. The nanny tax is frequently overlooked or misunderstood by household employers, particularly parents and elderly individuals who have never managed payroll before. Non-compliance can result in back taxes, penalties, and interest -- and in high-profile cases, it has derailed political careers. Understanding your obligations as a household employer is essential to staying compliant.

The nanny tax operates as a standard employer-employee payroll relationship applied to the household setting. When you pay a domestic employee $2,700 or more in 2024, you become a household employer and must complete several administrative steps. First, obtain an Employer Identification Number (EIN) from the IRS -- this is required even though you are an individual household employer rather than a business. Second, determine whether your employee is legally authorized to work in the US by completing Form I-9. Third, withhold the employee's share of Social Security (6.2 percent) and Medicare (1.45 percent) taxes from each paycheck, and add your employer matching contribution. At year end, report total wages and taxes on Schedule H, which is filed with your Form 1040. Provide your employee with a Form W-2 by January 31. You may also owe federal unemployment tax (FUTA) at 6 percent on the first $7,000 of wages if you paid $1,000 or more in any calendar quarter. State unemployment taxes vary by state and typically require separate quarterly filings.

Freelancers and small business owners who also employ domestic workers face the nanny tax obligation on top of their self-employment business taxes. This creates a situation where the same individual is both a self-employed taxpayer (reporting business income on Schedule C) and an employer (reporting household payroll on Schedule H). Managing both obligations simultaneously requires careful organization. The interaction between self-employment taxes and household employer taxes means freelancers have a more complex tax return than either pure employees or pure employers. It is strongly advisable to work with a CPA or tax professional if you are both self-employed and a household employer, as the combined payroll tax and self-employment tax obligations can result in large quarterly estimated tax payments that must be planned for throughout the year. One benefit for freelancers who use a dependent care flexible spending account (FSA) through a spouse's employer, or who claim the dependent care tax credit, is that nanny wages paid to a legitimate household employee are qualifying expenses. Properly reporting nanny wages creates the documentation needed to support these dependent care tax benefits.

Many household employers try to avoid nanny tax obligations by classifying their domestic worker as an independent contractor rather than an employee. This classification is almost always incorrect under IRS guidelines and can result in significant penalties if challenged. The IRS uses a behavioral control, financial control, and relationship-type test to determine worker classification. A nanny who works in your home, follows your schedule, uses your supplies, and is told how to care for your children is almost certainly an employee by these standards. Independent contractors generally have multiple clients, set their own hours, use their own tools, and operate their own businesses. If you misclassify a household employee as an independent contractor, you can be held liable for the uncollected employee taxes, plus penalties and interest. The worker also loses access to unemployment benefits they would have been entitled to as an employee. Correct classification from the beginning is far less expensive than correcting misclassification after an audit.

Step-by-step guide to nanny tax compliance: 1. Apply for an EIN at IRS.gov -- This free registration takes minutes online and gives you the employer ID needed for all payroll filings. 2. Verify the employee's eligibility to work -- Complete Form I-9 and keep it on file. 3. Set up a payroll system -- Use payroll software like HomePay, SurePayroll, or GTM Payroll that specializes in household employer payroll. These services handle withholding calculations and tax filings automatically. 4. Pay FICA taxes each pay period -- Withhold the employee's 7.65 percent (6.2 percent Social Security plus 1.45 percent Medicare) and add your matching employer contribution. 5. File Schedule H with your annual tax return and provide W-2 to your employee by January 31.

While Eonebill.ai is an invoicing platform rather than a payroll tool, it helps freelancers maintain the clean business income records that support accurate overall tax compliance -- including nanny tax planning. When you use the [free invoice generator](/free-tools/invoice-generator) to track all freelance income accurately throughout the year, your CPA has the complete financial picture needed to calculate quarterly estimated tax payments that cover both self-employment tax and household employer obligations. Eonebill Pro and Business plans at [Eonebill pricing](/pricing) provide an organized view of your business income that makes year-end tax preparation significantly easier when you are managing multiple tax obligations including both Schedule C income and Schedule H household payroll.

1. Not registering as a household employer: Many parents hire a nanny and simply pay cash without setting up an employer account with the IRS. This creates unreported payroll tax liability that accumulates with penalties and interest until discovered. 2. Misclassifying a household employee as an independent contractor: Issuing a 1099 to your nanny instead of a W-2 is incorrect in most cases and creates significant tax and legal exposure. 3. Paying below the reporting threshold but not tracking total payments: If you pay a nanny in cash each week and do not track total annual payments, you may unknowingly exceed the $2,700 threshold without triggering compliance. 4. Missing the W-2 deadline: Household employees must receive their W-2 by January 31. Late W-2s result in penalties of $60 per form if filed within 30 days, escalating to $310 per form if not corrected by August 1. 5. Failing to calculate the employer FUTA liability: Federal unemployment tax adds an additional 6 percent on the first $7,000 of wages. Many household employers only think about FICA and forget FUTA entirely.

[Self-employed person](/glossary/self-employed-person) describes the typical freelancer who may also be a household employer, creating dual tax obligations. [W-2 form](/glossary/w-2-form) is the annual wage statement issued to household employees just as it is issued to regular employees. [EIN](/glossary/ein) is required for all household employers to register with the IRS. [Income tax](/glossary/income-tax) applies to household employer filings in combination with Schedule H.