Nanny Tax

Nanny Tax: Overview

The “nanny tax” refers to federal employment taxes that apply when you hire household help and pay wages above certain thresholds. The IRS treats ongoing household workers—such as nannies, babysitters, cooks, butlers, and similar staff—as employees rather than independent contractors. That classification makes you a household employer responsible for Social Security, Medicare, and unemployment taxes on wages you pay.

Who counts as a household employee

A household employee is someone whose work you control and who performs ongoing services in your home. Common examples:
* Nannies and full‑time babysitters
* Live‑in or live‑out housekeepers, cooks, butlers
Exceptions include certain relatives (e.g., a spouse) and some casual, occasional workers; hiring through an employment agency usually places tax responsibility on the agency rather than the household.

When the nanny tax applies

Thresholds and rules can change, so confirm current limits with the IRS. Typical triggers include:
* Social Security and Medicare taxes become applicable once cash wages to an employee exceed the IRS threshold for household employment.
* Federal unemployment tax may apply if you pay a worker $1,000 or more in cash in any quarter.
If you pay a regular babysitter or nanny enough over the year (for example, weekend babysitting that totals several thousand dollars), those wages may meet the threshold that requires employment taxes.

Taxes and rates

Household employment taxes commonly include:
* Social Security: 6.2% withheld from wages (matched by the employer)
* Medicare: 1.45% withheld from wages (matched by the employer)
Together, employee and employer shares total 15.3%; some employers choose to pay the employee share as well.
* Federal unemployment tax (FUTA): may apply when quarterly wage thresholds are met; FUTA is assessed on wages up to a set annual limit.

Check current IRS publications for exact thresholds and limits before calculating payroll taxes.

Why compliance matters

Paying required taxes:
* Ensures the household employee earns covered employment credits (Social Security and Medicare) and qualifies for unemployment benefits.
* Creates a verifiable employment and income history—helpful for loans, mortgages, and credit applications.
* Helps employers access tax benefits such as Flexible Spending Accounts (FSA) and the Child and Dependent Care Credit where applicable.
Failing to treat a household worker as an employee or to pay employment taxes can result in penalties and potential charges for tax evasion.

Employer responsibilities

As a household employer you generally must:
* Register as an employer and obtain an Employer Identification Number (EIN) from the IRS.
* Withhold and/or pay applicable Social Security, Medicare, and unemployment taxes.
* Keep proper payroll records and file required tax forms.
Because payroll for household employees can be complex, many employers use payroll services that specialize in household employment.

Where to get official guidance

For detailed, up‑to‑date rules and thresholds consult IRS resources, especially Publication 926 (Household Employer’s Tax Guide) and related IRS topics on employment taxes for household employees.