Nanny Tax: What It Is and How to Calculate It

Hiring a nanny can provide much-needed support for families, but it also comes with specific financial responsibilities. One of those responsibilities is the “nanny tax,” a federal requirement that applies to families who employ household workers, including nannies, caregivers and housekeepers. As of 2024, if you pay your household worker $2,700 or more in a year, federal law requires withholding for Social Security and Medicare taxes, in addition to paying unemployment taxes.

A financial advisor can help you understand your tax obligations, manage payroll taxes and make sure that your taxes are filed correctly.

What Is the Nanny Tax?

The nanny tax refers to the federal and state taxes that employers must pay for household employees. If you hire a nanny and pay them over a certain threshold, you are considered their employer and must withhold and pay certain taxes on their behalf, along with the employer’s share of payroll taxes. The tax mainly includes Social Security and Medicare taxes (also known as FICA taxes), federal unemployment tax (FUTA) and possibly state-level employment taxes.

The IRS sets the threshold for when you must pay the nanny tax. In 2024, if you pay your household employee $2,700 or more in wages during the year, you are required to withhold and pay these taxes. It’s important to note that this tax applies whether the nanny is working part-time or full-time.

Who Pays the Nanny Tax?

The nanny tax is primarily the responsibility of the household employer, meaning the individual or family that hires the nanny. The employer must calculate and withhold the appropriate amounts from the nanny’s paycheck for Social Security and Medicare taxes. These taxes are split evenly between the employer and the nanny, with each contributing 7.65% of the nanny’s wages. Additionally, the employer is responsible for paying the full amount of the federal unemployment tax (FUTA) and, in some cases, state unemployment insurance taxes.

It’s important to distinguish between independent contractors and employees. Nannies, by definition, are considered household employees, not independent contractors, which is why the household employer must pay these taxes. Misclassifying a nanny as an independent contractor could result in penalties and back taxes.

How to Calculate Nanny Taxes

Calculating the nanny tax will require you to determine the wages paid to your nanny and apply the correct tax rates. Here’s a step-by-step breakdown:

1. Determine wages: The first step is to figure out how much you are paying your nanny in total for the year. This includes not only their hourly or salaried wages but also any bonuses, overtime or additional compensation like health insurance or transportation reimbursements.
2. Calculate FICA taxes: For 2024, Social Security and Medicare taxes combined are 15.30% of wages. The employer and nanny each pay 7.65%. To calculate FICA taxes, take your nanny’s total wages for the year and multiply that figure by 7.65% to find the amount you must withhold from their paychecks. Additionally, match it with an equal amount that you, as the employer, will pay.
3. Calculate FUTA Taxes: The federal unemployment tax is 6.00% on the first $7,000 of your nanny’s annual wages. However, if you pay state unemployment tax, the IRS allows a credit of up to 5.40%, reducing your federal rate to 0.60%. Only the employer pays FUTA; the nanny is not responsible for contributing to this tax.
4. Figure out any state taxes: Depending on where you live, you may be required to pay additional state unemployment or disability insurance taxes. State requirements vary, so it’s crucial to check with your state’s labor department or tax agency to understand your specific obligations.

Reporting and Paying Nanny Taxes

Once you have calculated the nanny taxes, you must follow the proper steps to report and pay them. The IRS requires household employers to file a Schedule H (Household Employment Taxes) with their personal federal income tax return. This form helps report all of the Social Security, Medicare and FUTA taxes you owe for your nanny.

Throughout the year, you will also need to withhold the correct amounts from your nanny’s paycheck and pay those taxes on a regular basis, typically quarterly. Many employers choose to work with a payroll service that specializes in household employees to manage these withholdings and payments, ensuring compliance with all tax laws.

For state unemployment taxes, you may be required to file a separate return with your state’s tax authority, so be sure to check local rules. Some states may require quarterly filings, while others may only need an annual return.

Exceptions to the Nanny Tax and Special Considerations

Not every household worker is subject to the nanny tax. There are some exceptions to be aware of:

• Family members: If your nanny is a close relative (and childcare is not their primary occupation), such as your child (under age 21), spouse or parent, you may not be required to pay the nanny tax.
• Employees under 18 years of age: If your nanny is under the age of 18 at any time during the year, you may not need to withhold Social Security and Medicare taxes, unless the housework performed is their principal occupation.
• Wages below the threshold: If you pay your nanny less than the annual threshold set by the IRS ($2,700 in 2024), you are not obligated to withhold or pay Social Security and Medicare taxes. However, you may still be responsible for unemployment taxes, depending on state laws.
• Non-cash payments: If you provide your nanny with non-cash benefits, such as room and board, these can often be excluded from wages for the purpose of calculating taxes.

It’s also important to remember that the nanny tax applies to all household employees, not just nannies. If you hire a housekeeper, gardener or any other worker in your home, you may need to follow similar tax rules.

Penalties for Non-Compliance

Failing to pay or properly report nanny taxes can lead to several serious consequences. The IRS may impose back taxes, interest and fines on unpaid amounts if household employers do not fulfill their tax obligations. In addition to these financial penalties, employers may also face additional legal fees and potential audits.

Employers who attempt to pay their nanny “under the table” to avoid taxes are at particular risk. If discovered, this could result in more severe penalties, including the payment of back taxes and interest, plus fines for tax evasion. In some cases, employers might be held liable for unpaid Social Security and Medicare taxes owed by the nanny, further increasing the financial burden. 

To avoid these issues, it’s important to handle all tax matters related to household employees transparently and in accordance with federal and state regulations.

Bottom Line

Understanding and managing nanny taxes is an important part of hiring household employees. By familiarizing yourself with the tax requirements and learning how to handle withholdings for Social Security, Medicare and unemployment taxes, you can meet your obligations as an employer. Knowing the thresholds and exceptions helps ensure that you’re in compliance with federal and state laws. While it may seem complex at first, taking the necessary steps to calculate, report and pay these taxes can help you avoid penalties and maintain a professional, legal arrangement with your household employees.

Tax Planning

• A financial advisor can help optimize your finances to lower your tax liability. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• SmartAsset’s paycheck calculator can help you calculate your take home pay per paycheck for both salary and hourly jobs after taking into account federal, state and local taxes.

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