Nanny Tax Guide

What Is the Nanny Tax?

"Nanny tax" is the everyday name for the federal employment taxes that apply when you hire someone to work in your home. IRS Publication 926 calls you a household employer and lists the kinds of workers it covers: babysitters, caretakers, cleaning workers, domestic workers, drivers, health aides, housekeepers, maids, nannies, private nurses and yard workers, among others. The taxes themselves are the ordinary payroll taxes every employer pays:

• Social Security and Medicare tax, split between you and the employee, once the employee's cash wages for the year reach the threshold.
• Federal unemployment (FUTA) tax, paid only by you, once your household payroll reaches $1,000 in a calendar quarter.
• Federal income tax withholding, only if the employee asks and you agree.

The difference from a business is paperwork, not rates. A household employer does not file quarterly Form 941 returns. Instead you report the whole year on Schedule H, attached to your own Form 1040, and the total is added to your income tax on Schedule 2.

Who Counts as a Household Employee?

Publication 926 uses a control test: the worker is your employee "if you can control not only what work is done, but how it is done." When that is true, it does not matter whether the work is full time or part time, or whether you found the worker through an agency or from a list an agency or association provided.

Publication 926's example is a babysitter who cares for your child and does light housework four days a week in your home, follows your instructions, and uses your household equipment and supplies. That worker is your household employee. Two situations usually fall outside the rules:

• Self-employed workers. If only the worker controls how the work is done, typically someone who brings their own tools and offers services to the public, they are self-employed. A daycare provider caring for children in their own home is the usual example.
• Agency employees. If an agency provides the worker and controls what work is done and how, the worker is the agency's employee. IRS Publication 503 adds that if an agency merely hands you a list of sitters and you hire and pay one directly, the sitter may be your employee.

When Do You Owe Social Security and Medicare Tax?

Social Security and Medicare apply when you pay one household employee cash wages at or above the year's threshold. Publication 926 says that if you pay $3,000 or more in cash wages in 2026, "all cash wages you pay to that employee in 2026 (regardless of when the wages were earned) up to $184,500 are social security wages and all cash wages are Medicare wages." If you pay less than $3,000, "none of the wages you pay the employee are social security or Medicare wages."

Two details trip people up. First, the test uses cash wages: pay by cash, check or bank transfer. The value of meals, lodging and other noncash items does not count toward the threshold and is not Social Security or Medicare wages, although it can still be taxable income to the employee. Second, the test is all or nothing. Paying $3,000 instead of $2,999 adds $459 of Social Security and Medicare tax, split between you and the employee, because every dollar becomes taxable.

Publication 926 lets you withhold the employee's share from the start of the year even if you are not sure you will reach $3,000; if you end up below it, you repay the employee.

Which Family Members and Young Workers Are Exempt?

Publication 926 tells you not to count wages paid to these people as Social Security or Medicare wages, even if they reach $3,000:

• Your spouse.
• Your child under age 21.
• Your parent, unless the parent exception applies: your parent cares for your child (including an adopted child or stepchild) who is under 18 or has a physical or mental condition requiring an adult's personal care for at least 4 continuous weeks in the quarter, and you are divorced and not remarried, a widow or widower, or living with a spouse whose condition prevents them from caring for the child for at least 4 continuous weeks in the quarter.
• An employee under 18 at any time during the year, unless household work is the employee's principal occupation. If the employee is a student, household work is not their principal occupation.

FUTA has a shorter list. Wages to your spouse, your child under 21 and your parent are never FUTA wages, with no parent exception. Wages to a teenage babysitter are not on the FUTA list, so a teenager can be exempt from Social Security and Medicare but still count toward FUTA once your household payroll reaches $1,000 in a quarter.

When Do You Owe Federal Unemployment (FUTA) Tax?

You owe FUTA tax if you paid total cash wages of $1,000 or more to all your household employees in any calendar quarter of the current year or the year before. A calendar quarter is January through March, April through June, July through September, or October through December. Once the test is met, the first $7,000 of cash wages you pay each household employee during the year are FUTA wages.

The FUTA rate is 6.0%, but you can take a credit of up to 5.4% for contributions you pay to your state unemployment fund, leaving a net rate of 0.6%, or $42 a year on a full $7,000. Three things change that number:

• Late state contributions. To get the full credit for 2026, you must pay all required state unemployment contributions by April 15, 2027. The credit for contributions paid later is limited to 90% of what it would have been.
• No state contributions. Without contributions the credit is not available, and FUTA can be the full 6.0%, or $420 on $7,000.
• Credit reduction states. A state that has not repaid federal unemployment loans is a credit reduction state, and its employers lose part of the credit. For 2025, Worksheet 2 of the Schedule H instructions lists California at 1.2% and the U.S. Virgin Islands at 4.5%, so a California household employer pays $126 on $7,000 instead of $42. The Department of Labor determines the 2026 list in November 2026.

FUTA is never withheld from the employee. Publication 926 is explicit: "You must pay it from your own funds." Most states also charge their own unemployment tax; contact your state's unemployment tax agency to register.

Do You Have to Withhold Federal Income Tax?

No. Publication 926 says you are "not required to withhold federal income tax from wages you pay a household employee." You withhold it only if the employee asks and you agree, and either of you can end the arrangement by telling the other in writing.

If you agree, the employee gives you a Form W-4, you figure the amount from the Publication 15-T tables, and you report what you withheld on Schedule H line 7. The money is the employee's tax passed through you to the IRS, so it shows up in your Schedule H total but is not a cost to you. Social Security and Medicare withholding is different: once the $3,000 test is met it is required, not optional.

Can You Pay the Employee's Share Yourself?

Yes. Many families agree on a net weekly amount and cover the employee's 7.65% themselves. Publication 926 allows it, with one consequence: the taxes you pay for the employee "must be included in the employee's wages for income tax purposes." They are not counted as Social Security, Medicare or FUTA wages.

Publication 926's own example: you pay $100 every Friday and cover the employee's share. Each payday you pay $15.30 of tax, $7.65 for the employee and $7.65 for yourself. For Social Security and Medicare the wage is $100; for income tax it is $107.65. Over 52 weeks that is $5,200 in Form W-2 boxes 3 and 5 and $5,597.80 in box 1, with the $397.80 you paid reported in boxes 4 and 6.

What Forms Do You File, and When?

For 2026 wages, Publication 926 sets out this sequence:

A Form W-2 is required for each employee whose Social Security and Medicare wages reach $3,000 or from whom you withheld federal income tax. If the employee leaves during the year, you can file the W-2 right after the last payment. For 2025 wages the same steps apply with the $2,800 threshold, and the W-2 deadline was February 2, 2026 because January 31 fell on a Saturday.

How Do You Pay the Nanny Tax During the Year?

Because Schedule H tax is added to your income tax, the IRS treats it like the rest of your tax bill when it checks whether you paid enough during the year. Publication 926 suggests three ways to cover it:

• Ask your own employer to withhold more federal income tax from your wages, using a new Form W-4.
• Make or increase estimated tax payments. For 2026 the due dates are April 15, June 15 and September 15, 2026, and January 15, 2027.
• If you own a business or farm, include the household taxes with your business employment tax deposits instead.

If you do none of these, the whole amount is due with your return and an estimated tax penalty can apply. The Quarterly Tax Calculator and the W-4 Withholding Calculator help you spread it out, and the Quarterly Tax Guide explains the safe-harbor rules.

Do Nanny Taxes Count Toward the Childcare Credit?

Yes. IRS Publication 503 says "the taxes you pay on wages for qualifying child and dependent care services are work-related expenses." So the employer share of Social Security and Medicare, FUTA and state unemployment tax you pay on a nanny's wages can be added to the wages themselves when you figure the child and dependent care credit or a dependent care FSA reimbursement, subject to those benefits' dollar limits.

Paying a nanny on the books also gives you the paper trail the credit needs: the provider's name, address and identifying number on Form 2441. Compare the two benefits in Dependent Care FSA vs Tax Credit or with the Childcare Tax Benefit Calculator.

Practitioner Insight (LMN Tax Inc.)

Real-World Scenarios

When the Rules Differ

• Independent contractors. If the worker controls how the work is done and offers services to the public, there is no household employment tax; the worker pays self-employment tax instead.
• Several employees. The $3,000 test and the $7,000 FUTA base are per employee, but the $1,000 FUTA quarter test adds all household employees together.
• Business owners. Sole proprietors and farmers can report household employees on their business employment tax returns instead of Schedule H.
• State rules. States set their own unemployment thresholds and some require disability or paid family leave contributions; these are not covered by Schedule H.
• Transit and parking benefits. For 2026, up to $340 a month each for qualified parking and transit can be excluded from wages.
• Puerto Rico and the U.S. territories. Different forms (Form 499R-2/W-2PR, Form 1040-SS) and rules apply.

Frequently Asked Questions

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