The Nanny Tax, Explained

Who Counts as a Household Employee

A household employee is someone you hire to do work in or around your home where you control what is done and how it is done. The category is broad and covers far more than nannies. What matters is the degree of control, not the job title or whether the work is full time.

• Nannies, babysitters on a regular schedule, and au pairs
• Housekeepers, cleaners, and private cooks
• Senior caregivers and home health aides hired directly rather than through an agency
• Gardeners and drivers you direct personally
• Not included: workers who control their own methods, bring their own tools, and serve the general public as a business

The Two Thresholds That Matter

Two separate dollar thresholds decide which taxes apply, and they work differently. The Social Security and Medicare threshold is annual and per employee. The unemployment threshold is quarterly and across all household employees combined. You can easily cross one and not the other.

• Social Security and Medicare: triggered if you pay any one household employee $3,000 or more in cash wages during 2026, up from $2,800 in 2025
• Once crossed, FICA applies to every dollar you paid that employee for the year, not only the amount above the threshold
• Federal unemployment tax: triggered if you pay $1,000 or more in total cash wages to household employees in any calendar quarter
• The $1,000 quarterly figure is statutory and does not move with inflation, unlike the annual threshold
• State unemployment thresholds are separate and are often lower, so check your state

What You Withhold Versus What You Owe

Some of these taxes come out of the employee's pay and some come out of your pocket. Keeping the two straight is the core of running household payroll correctly, and it is where the stub earns its keep.

• Withheld from the employee: Social Security at 6.2% and Medicare at 1.45% of cash wages
• Paid by you as the employer: a matching 6.2% and 1.45%
• Paid by you alone: federal unemployment tax, 6.0% on the first $7,000 of wages, reduced to 0.6% by the standard state credit
• Social Security applies up to the annual wage base, $184,500 for 2026; Medicare has no cap
• You may pay the employee's share yourself rather than withholding it, but that amount then counts as additional wages for income tax purposes

Federal Income Tax Withholding Is Optional

This is the rule most families get wrong in one direction or the other. You are not required to withhold federal income tax from a household employee's wages. You should withhold it only if the employee asks you to and you agree, in which case they give you a Form W-4 and you withhold like any employer. Social Security and Medicare withholding, by contrast, is not optional once the threshold is crossed.

• Income tax withholding happens only by mutual agreement, documented with a Form W-4
• Many employees prefer it, because the alternative is a large bill at filing time
• If you do not withhold, the employee is responsible for their own estimated payments
• Social Security and Medicare withholding is mandatory above the annual threshold either way

What Paying Under the Table Actually Costs

Paying cash without reporting is common and is usually framed as a favor to the employee. It is generally the worse deal for both sides, and the exposure sits mostly with the family.

• Back taxes, penalties, and interest if the arrangement is discovered, often years later
• The employee builds no Social Security or Medicare credits for those years
• The employee cannot claim unemployment benefits, and a claim filed anyway is a common way these arrangements surface
• You cannot use a Dependent Care FSA or claim the Child and Dependent Care Credit without reporting the caregiver's identifying number
• A workers compensation claim by an unreported employee can be expensive and is not covered by most homeowner policies

The Tax Benefits Only Work If You Do It Properly

The reporting requirement cuts both ways. Families who pay correctly can often recover a meaningful share of the cost through a Dependent Care FSA or the Child and Dependent Care Credit, both of which require you to report the caregiver's name, address, and taxpayer identification number. For many households the benefit substantially offsets the employer taxes.

Where This Gets Filed

Household employment taxes are reported on Schedule H, filed with your personal Form 1040 rather than through quarterly business payroll returns. You still need an employer identification number and you still issue a W-2 in January. Because Schedule H tax is settled with your annual return, you may need to increase your own withholding or make estimated payments during the year to avoid an underpayment penalty.