Hiring a nanny makes you a household employer with specific legal and tax obligations. Understanding these requirements helps you comply with federal and state laws, avoid penalties, and ensure proper protection for both your family and your employee.

Understanding Household Employer Status

If you pay a household employee (nanny, housekeeper, caregiver) $2,600 or more per year (2024 threshold), you're legally a household employer. This triggers specific federal tax obligations including Social Security, Medicare, and potentially federal unemployment taxes. You must withhold and pay these taxes even if you pay your nanny through a service or agency. Independent contractor classification is inappropriate for nannies—the IRS considers domestic workers who work in your home under your direction as employees.

Federal Tax Requirements

As a household employer, you must pay Social Security tax (6.2% of wages), Medicare tax (1.45% of wages), and potentially Federal Unemployment Tax Act (FUTA) at 6% on the first $7,000 of wages. You'll report household employment taxes annually using Schedule H with your Form 1040. Many employers withhold the employee's share of Social Security and Medicare (7.65% total) from paychecks, though you can choose to pay both employer and employee portions yourself. Failure to pay household employment taxes can result in penalties, interest, and potential issues with future Social Security benefits for your nanny.

State Tax Obligations

State requirements vary significantly. Most states require state unemployment insurance (SUI), with rates typically 1-5% of wages. Some states mandate state disability insurance, paid family leave contributions, or workers compensation insurance. Certain states have state income tax withholding requirements for household employees. Research your specific state's requirements through your state's labor department or consult a household employment specialist. Non-compliance with state taxes can result in significant penalties and back tax assessments.

Obtaining an Employer Identification Number (EIN)

You'll need an EIN from the IRS to report household employment taxes. Apply free online at IRS.gov—the process takes about 15 minutes and you receive your EIN immediately. Your EIN is separate from your Social Security number and identifies you as an employer for tax purposes. Use your EIN on all employment tax forms, workers compensation policies, and payroll documentation. Never use your Social Security number for employment purposes to protect against identity theft.

Payroll Requirements and Documentation

Maintain detailed payroll records including hours worked, gross wages paid, tax withholding amounts, and net pay for each pay period. Provide your nanny with pay stubs showing gross pay, deductions, and net pay. At year-end, you must provide Form W-2 by January 31st showing total wages and taxes withheld. Keep payroll records for at least four years. Many families use household payroll services like HomePay, Poppins, or SurePayroll ($50-150/month) to handle calculations, tax deposits, and form filing automatically.

Written Work Agreement Essentials

Create a comprehensive written work agreement covering job duties, work schedule and hours, compensation and payment schedule, benefits including vacation and sick time, termination policies and notice requirements, confidentiality and privacy expectations, emergency procedures and contacts, and house rules and expectations. This document protects both parties by establishing clear expectations. While not legally required in all states, written agreements prevent misunderstandings and provide documentation if disputes arise. Update agreements annually during performance reviews.

Workers Compensation Insurance

Most states require workers compensation insurance for household employees. This coverage protects you from liability if your nanny is injured while working and ensures your nanny receives medical treatment and wage replacement for work-related injuries. Costs typically run $500-1,500 annually depending on your location and your nanny's wages. Some homeowners insurance policies include limited domestic worker coverage, but verify amounts and requirements. Operating without required workers comp insurance can result in significant fines and personal liability for injuries.

Automobile Insurance Considerations

If your nanny drives your children, update your auto insurance policy. Notify your insurance company that a household employee regularly drives your vehicle. Some insurers require adding the nanny as a named driver. If your nanny uses their personal vehicle for work duties, verify they carry adequate liability coverage (minimum $500,000 recommended) and consider requiring you be named as an additional insured. Discuss whether you'll cover increased insurance premiums or provide mileage reimbursement at the IRS standard rate ($0.67/mile in 2024).

Form I-9 and Employment Eligibility

Federal law requires verifying every employee's identity and employment authorization using Form I-9. Complete Section 1 on or before your nanny's first day of work. Your nanny must present acceptable documents proving identity and work authorization—typically a U.S. passport, permanent resident card, or driver's license plus Social Security card. Keep completed I-9 forms for three years after hiring or one year after termination, whichever is longer. Never hire anyone you know is not authorized to work in the United States—penalties for knowingly hiring unauthorized workers are severe.

Overtime Requirements

Federal Fair Labor Standards Act (FLSA) requires overtime pay at 1.5 times the regular rate for hours over 40 per week for live-out domestic workers. Some states have stricter requirements, including daily overtime or overtime for live-in workers. Calculate overtime properly—if your nanny earns $20/hour and works 45 hours, they're entitled to 40 hours at $20 ($800) plus 5 hours at $30 ($150) for total pay of $950. Misclassifying employees as exempt or failing to pay required overtime creates significant legal and financial liability.

Termination and Final Pay Requirements

When employment ends, comply with state final paycheck laws. Some states require final pay on the last day of work, while others allow up to the next regular pay date. Final pay must include all earned wages including unused vacation time if your state or agreement requires payout. Issue the final Form W-2 by January 31st of the following year. Provide written verification of employment dates if requested for future background checks. Handle terminations professionally and compassionately—your nanny may request references, and positive relationships benefit everyone.

Payroll Service vs DIY Management

Many families use payroll services specializing in household employment. These services calculate taxes, file required forms, make tax deposits, provide pay stubs and W-2s, and ensure compliance with changing regulations. Costs typically run $50-150 monthly. DIY payroll is possible but requires staying current on tax law changes, making timely deposits, and filing multiple forms correctly. For most families, professional payroll services provide peace of mind and actually save money by preventing penalties and ensuring proper deductions on your own tax return.

Conclusion

While household employment tax obligations may seem daunting, proper compliance protects your family legally and financially. Budget for total employment costs including taxes (approximately 10-15% above gross wages), use an EIN instead of your Social Security number, maintain detailed records, consider professional payroll services, and create written work agreements. These steps establish professional employment relationships, demonstrate respect for your nanny, and ensure legal compliance. The modest investment in proper tax and legal compliance prevents costly penalties and provides valuable peace of mind.