The Nanny Tax: Household Employees, Explained

By Tom, CPA · Updated October 27, 2026

Part of: Tax Planning

TL;DR: Pay a household employee $3,000 or more in cash wages in 2026 and you owe Social Security and Medicare. Paying $1,000 in a quarter triggers FUTA. Income tax withholding is optional. You report it on Schedule H and issue a W-2, and a dependent care FSA offsets much of the cost.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

The tax code is 4 million words long, and a surprising number of them apply to the person who watches your kids. Pay a nanny, housekeeper or caregiver enough, and you become an employer, with payroll taxes, W-2s and a Schedule H. Skip it, and you join a long tradition of people who discovered the "nanny tax" during a confirmation hearing.

This guide covers who counts as a household employee, the 2026 thresholds, what you withhold and pay, the paperwork, the tax breaks that soften the cost, and a worked example.

CPA Warning Label: Paying a household worker off the books risks back taxes and penalties and forfeits childcare tax breaks. Check your state’s separate employer rules.

Who is a household employee?

A household employee is someone you hire to work in or around your home whose work you control: what is done and how. Nannies, housekeepers, private caregivers, cooks, gardeners and drivers can all qualify. It does not matter whether they work full or part time, or whether you call them a contractor.

Not household employees: workers who are self-employed and control their own methods, like a plumber, an agency's cleaning crew, or a daycare center. If an agency employs the worker and controls the work, the agency is the employer.

Also excluded from Social Security and Medicare (Publication 926): your spouse, your child under 21, your parent (with limited exceptions), and anyone under 18 at any time during the year unless household work is their principal occupation. Teen babysitters are generally exempt.

The 2026 thresholds

• Social Security and Medicare: required if you pay one household employee cash wages of $3,000 or more in 2026 (Topic 756). Once over the threshold, all wages count, from the first dollar.
• Federal unemployment (FUTA): required if you pay total cash wages of $1,000 or more to household employees in any calendar quarter of this year or last year. The rate is 6% on the first $7,000 of each employee's wages, usually reduced to 0.6% with a credit for state unemployment contributions.
• Federal income tax withholding: not required. You withhold only if the employee asks and you agree, using their W-4.
• State rules often have their own unemployment, disability and paid leave taxes with different thresholds.

Social Security tax applies only up to the 2026 wage base of $184,500, which few nannies approach.

What you withhold and pay

You withhold the employee's 7.65% from each paycheck. You may choose to pay the employee's share yourself instead of withholding it; in that case, the amount you pay is additional wages for income tax purposes, though not for Social Security and Medicare.

Non-cash pay like meals and lodging provided for your convenience in your home generally is not counted as cash wages for these thresholds.

Paperwork and deadlines

1. Get an EIN (employer identification number) from the IRS. You cannot use your SSN on a W-2.
2. Verify work eligibility with Form I-9 and keep it on file.
3. Register with your state for unemployment insurance and any other state programs; report new hires as required.
4. Pay through the year: household employer taxes are paid with your own Form 1040 via Schedule H. To avoid an underpayment penalty, increase your own W-4 withholding at your job or make quarterly estimated payments to cover them.
5. Give the employee a Form W-2 by January 31 and file it with the Social Security Administration with Form W-3.
6. File Schedule H with your Form 1040 in April.
7. Keep records for at least four years.

Payroll services built for household employers handle most of this for a monthly fee. If you do it yourself, set calendar reminders for the W-2 deadline and for each quarterly estimated payment, since the IRS sends no reminders to household employers.

Breaks that offset the cost

• Dependent care FSA: up to $7,500 per household for 2026 of pre-tax pay toward childcare, including a nanny, for children under 13. On the books is required; you need the caregiver's tax ID.
• Child and dependent care credit: from 2026, the maximum rate rises to 50% for lower incomes, phasing down with income, on up to $3,000 of expenses for one child or $6,000 for two or more, reduced by FSA reimbursements.
• Medical expense deduction: wages and employer taxes for a caregiver providing nursing-type services for a chronically ill person may be deductible medical expenses above 7.5% of AGI. See the medical expense deduction.
• Benefits for the nanny: paying on the books gives your employee Social Security credits, unemployment eligibility and a documented income history for loans and the earned income credit.

Common situations and edge cases

• Nanny shares. When two families share one nanny, each family is usually a separate employer for the wages it pays. Each applies the $3,000 threshold to its own payments, gets its own EIN, and issues its own W-2. Splitting the cost does not split away the obligation.
• Caregivers for a parent. If you pay someone to care for your parent in your home or theirs and you control the work, you may be the household employer. If your parent pays and directs the care, they may be the employer. Paying your own adult child to care for a parent can be a household employment situation too, though family exemptions differ.
• Overtime. Federal law generally requires overtime pay for live-out household workers over 40 hours a week. Overtime premiums are wages for these taxes.
• Bonuses and gifts. A holiday cash bonus is wages. A small non-cash gift generally is not.
• Ending employment. Pay final wages under your state's rules and still issue a W-2 in January. A former nanny may file for unemployment, and your state will charge your account.
• Overtime deduction. For 2025 through 2028, your employee may be able to deduct qualified overtime premium pay, up to $12,500 ($25,000 joint), phasing out above $150,000 of income ($300,000 joint). You may need to report qualified overtime separately on the W-2.

Illustration: a part-time nanny

Illustration: a family pays a nanny $25 an hour for 30 hours a week, 50 weeks in 2026: $37,500 of cash wages. State unemployment is 2.7% of the first $10,000 for the example.

Offsets: the family puts $7,500 into a dependent care FSA. At 24% federal plus 7.65% FICA, that saves about $2,374. Net extra cost of paying legally: roughly $807 for the year, before any state tax savings.

Assumptions: one child under 13, employer has a dependent care FSA, no federal income tax withholding requested, state rates illustrative.

Risks of paying off the books

• Back taxes, penalties and interest if discovered, often through an unemployment claim or the worker's own tax filing.
• No dependent care FSA or credit, since you cannot report the provider ID without exposing the arrangement.
• Your nanny loses Social Security credits, unemployment eligibility and workers' compensation coverage where required.
• It may surface at a bad time: a security clearance, a political appointment, a messy firing.

If you hire through equity-rich years, see the employee stock guide for how vesting income affects withholding needed to cover Schedule H. Back to the tax planning hub, or see the new baby checklist.