How to pay the nanny tax for a household employee in 2025

Many families hire nannies, housekeepers, home health aides, and other household workers without realizing that doing so makes them employers in the eyes of the IRS. That status comes with real tax obligations: Social Security and Medicare taxes, potential federal unemployment taxes, and a separate annual filing requirement that most tax software does not handle automatically.

The informal name for these obligations is the nanny tax, and it applies whenever you pay a household employee $2,700 or more in cash wages during the 2025 calendar year. Understanding exactly what you owe, how to pay it, and how to document the arrangement properly protects you from IRS penalties and, in many cases, opens the door to a meaningful tax credit on your own return.

What is the nanny tax, and who owes it?

The nanny tax is not a single tax but a collection of employer obligations that arise when you pay wages to a household worker. A household employee is someone you hire to work in or around your private home on a regular basis, where you control both what work is done and how it is done.

Individuals who regularly employ any of the following workers typically qualify as household employers:

• Nannies and au pairs
• Housekeepers and maids
• Home health aides and personal care attendants
• Private cooks and chefs
• Gardeners and groundskeepers employed directly by the household
• Drivers and personal assistants employed for household duties

Self-employed workers, who set their own hours, provide their own tools, and work for multiple clients, are generally independent contractors rather than household employees. However, the IRS applies specific tests to determine the correct classification, and misclassifying an employee as a contractor can result in back taxes and penalties.

IRS Publication 926, the Household Employer's Tax Guide for 2026, is the primary IRS reference for all nanny tax rules. It covers the wage threshold, withholding requirements, federal unemployment tax, and Schedule H filing instructions. Reviewing it before you issue your first paycheck is one of the simplest ways to avoid costly compliance errors.

What are the 2025 wage thresholds for household employers?

Two dollar thresholds determine which taxes you owe as a household employer. Both adjust annually, so confirming the current year's figure before you start paying wages is essential.

Social Security and Medicare (FICA) threshold: If you pay a household employee $2,700 or more in cash wages in 2025, both you and your employee owe Social Security and Medicare taxes on those wages. This is the threshold published in IRS Publication 926 for the 2025 tax year.

Federal Unemployment (FUTA) threshold: If you pay a household employee cash wages of $1,000 or more in any calendar quarter in 2025, you owe federal unemployment tax on the first $7,000 of that employee's annual wages.

These thresholds are independent. An employee you pay $1,100 in a single quarter triggers FUTA even if their annual total falls below the FICA threshold. Most household employers who owe FUTA will also owe FICA, but the rules apply separately.

Non-cash wages, such as meals and lodging provided to the employee, are generally not counted toward these thresholds. Families who provide a live-in caregiver with room and board should confirm how those benefits are treated before calculating their obligations.

What taxes does a household employer actually pay?

If your household employee clears the FICA threshold, you owe the following:

1. Employer FICA taxes: 6.2% for Social Security and 1.45% for Medicare on all wages paid, totaling 7.65% of gross wages. This is your cost as the employer and is in addition to the employee's share.
2. Employee FICA taxes: An equal 7.65% withheld from the employee's wages. You are legally required to withhold and remit this amount. You may choose to pay both the employer and employee shares yourself rather than withholding them from wages, but doing so treats the employer-paid employee share as additional taxable wages for the employee.
3. Federal Unemployment Tax (FUTA): 6% on the first $7,000 of wages paid to the employee during the calendar year, reduced by a credit of up to 5.4% if you pay state unemployment taxes on time, making the effective FUTA rate as low as 0.6% for most employers.
4. State taxes: Most states with income taxes also impose state income tax withholding and state unemployment tax obligations for household employers. Requirements vary significantly. Your state's department of revenue or workforce agency publishes the specific rules.

As a household employer, you are also responsible for withholding federal income taxes from your employee's wages if the employee requests it by completing Form W-4. Federal income tax withholding is not legally required for household employees the way FICA is, but most workers will request it to avoid owing taxes when they file.

The State Tax Deadlines resource provides a state-by-state schedule of reporting deadlines, many of which differ from the federal Schedule H timeline.

How do you pay and file the nanny tax?

Household employers do not make payroll tax deposits the way business payroll departments do. Instead, you pay household employment taxes through your own federal income tax payments during the year and report everything on Schedule H, which you attach to your personal Form 1040.

Here is the complete process:

1. Get an Employer Identification Number (EIN). Apply for a free EIN through the IRS website before paying your employee for the first time. You need the EIN to file Schedule H and issue Form W-2.
2. Adjust your withholding or pay estimated taxes. Because household employment taxes are paid with your individual return, you need enough tax withheld from your paycheck or paid in quarterly estimated taxes to cover both your income tax and the FICA and FUTA you owe as an employer. Use Form W-4 to increase your withholding or make larger estimated payments each quarter.
3. Keep payroll records. Track wages paid, dates of payment, hours worked, and any taxes withheld. These records support your Schedule H and Form W-2 filings.
4. File Schedule H with your Form 1040. Report all household employment taxes for the year on Schedule H. This form calculates the total FICA and FUTA you owe and adds it to your federal tax liability.
5. Issue Form W-2 by January 31. You must give your employee a Form W-2 by January 31 of the year following the tax year and submit Copy A to the Social Security Administration by the same deadline.

For families where one spouse is self-employed, the Home office deduction and household employment taxes are calculated separately. Schedule H does not interact with Schedule C, and keeping both clearly documented prevents confusion at filing time.

How does the child care credit offset nanny costs?

Families who hire a household employee to care for a child under age 13, or a dependent or spouse who cannot care for themselves, may qualify for the child and dependent care credit. This credit directly offsets a portion of your out-of-pocket care expenses, including wages you pay a household employee, making the overall cost of compliant employment meaningfully lower.

For 2025, the credit applies to up to $3,000 in qualifying expenses for one qualifying person or $6,000 for two or more. The credit rate ranges from 20% to 35%, depending on your adjusted gross income, providing a maximum credit of $1,050 for one person or $2,100 for two or more.

To qualify, the care must enable you and your spouse to work or look for work. Child & dependent tax credits on the Instead platform can model this credit alongside your household employer obligations to show your net cost after benefits.

If your employer offers a dependent care flexible spending account (FSA), you can contribute up to $5,000 pre-tax through payroll, which reduces your taxable wages and partially replaces the credit for many families. You cannot claim both the credit and the FSA exclusion on the same dollars. IRS Publication 503 covers the child and dependent care credit rules in full, including the income-based phase-out calculations and the FSA coordination rules.

What nanny tax mistakes cost employers the most?

Paying cash without keeping records. Paying a household employee in cash is not prohibited, but the IRS expects you to track wages, issue a W-2, and pay employment taxes regardless of how the payment is made. Cash payments without documentation create significant audit risk and can result in penalties for failing to file required returns.

Treating an employee as a contractor. If you control the worker's schedule, provide the tools and supplies, and the worker serves primarily your household, the IRS will likely classify that person as an employee. Issuing a Form 1099-NEC instead of a W-2 when the worker is actually an employee can result in back taxes, interest, and penalties for both the misclassification and the failure to withhold.

Missing the EIN requirement. Using your Social Security number instead of an EIN on household employment filings poses an identity-theft risk and may cause processing errors. Applying for an EIN takes minutes at IRS.gov and is required before filing.

Forgetting state obligations. Most states require separate household employer registration, state unemployment tax payments, and sometimes workers' compensation insurance. Federal compliance alone is not sufficient in states with independent requirements.

Not adjusting withholding or estimates. Household employment taxes are added to your own income tax bill when you file. If you do not increase your withholding or estimated payments to account for the additional liability, you may owe a substantial amount at filing and face underpayment penalties on top. Reviewing your estimated payments each quarter using IRS Publication 505 prevents surprises at filing time.

Business owners who also employ household workers should carefully coordinate their personal and business tax planning. Strategies like Hiring kids within a business operate under entirely different rules and generate business deductions, whereas household employment expenses remain personal.

How does hiring a family member change the nanny tax rules?

Some families hire an older child or other family member to provide household services. The nanny tax rules also apply to these arrangements, though specific FICA exemptions apply to certain family relationships.

Wages paid to your child under age 21 who provides domestic services in your private home are exempt from FICA taxes. Wages paid to your spouse for household services are also FICA-exempt. Wages paid to your parents for providing household services are FICA-exempt if you have a child under age 18 or a physically or mentally incapacitated person living in your home who requires care.

These exemptions apply only to Social Security and Medicare taxes. Federal income tax withholding rules and FUTA obligations may still apply depending on the circumstances. The Hiring kids strategy goes further for family businesses that want to shift income to children while generating legitimate business deductions, which is a separate arrangement governed by different rules.

Household employers who also run a Health reimbursement arrangement through a business should confirm that household employee benefits are kept strictly separate from any business benefit arrangements to avoid compliance complications with both programs.

Handle household employer taxes simply with Instead

Household employer obligations include maintaining payroll records, issuing W-2s, filing Schedule H, and coordinating payments with your personal estimated taxes throughout the year. Missing any step can trigger penalties that exceed what you would have paid with proper compliance from the start.

Instead keeps every piece of your household employer tax picture organized in one place. Instead's intelligent system tracks wages paid, calculates your FICA and FUTA liability, flags the child and dependent care credit opportunity, and ensures Schedule H is accounted for in your total estimated tax position throughout the year.

Use the tax savings feature to calculate your net household employer cost after available credits, and the tax reporting feature to generate the payroll records and Schedule H documentation you need at filing time. Review our pricing plans and make household employer compliance straightforward.

Frequently asked questions

Q: Do I owe the nanny tax for a part-time babysitter?

A: It depends on total wages paid during the year. If you pay the same babysitter $2,700 or more in cash wages during 2025, you owe FICA taxes on those wages even if the work is part-time. Occasional babysitters paid by different families generally are not household employees, but a regular caregiver working primarily for your family likely qualifies as one.

Q: Do I have to withhold income taxes from a nanny?

A: Federal income tax withholding for household employees is optional unless the employee requests it by completing a Form W-4. However, withholding is a courtesy that helps your employee avoid a large balance due at the time of filing. You are required to withhold and remit the employee's share of FICA taxes regardless of whether you withhold income taxes.

Q: What if my employee does not file a return?

A: Your obligation as an employer exists independently of whether your employee files a return. You must withhold and remit taxes, issue a W-2, and file Schedule H on time. Whether your employee files their own return does not affect your compliance requirements or potential liability.

Q: Can I deduct nanny wages on my business tax return?

A: No. Wages paid for household services in your private home are personal expenses, not business deductions. The only available tax relief is the child and dependent care credit on your personal return, which partially offsets qualifying care expenses, including household employee wages, when the care enables you to work.

Q: What if I did not pay the nanny tax in prior years?

A: Unpaid household employment taxes generate interest and penalties from the original due date. The IRS can assess back taxes for both employer and employee FICA amounts, FUTA, and applicable penalties. Voluntary disclosure and paying past-due amounts with interest is generally preferable to waiting for an IRS notice. A tax professional can calculate prior-year liability and help negotiate payment arrangements if needed.