How to Pay Your Nanny Legally: A Complete Guide for Household Employers

If you’ve hired (or are thinking about hiring) a nanny, one of the most important things to understand is how to pay your nanny legally.

Many families don’t realize that paying a nanny isn’t casual—it comes with tax obligations, employment rules, and reporting requirements. The good news is that once you understand the basics, it’s very manageable—and doing it correctly protects both you and your employee.

This guide explains exactly how to pay your nanny legally, with references to official government guidance so you can feel confident you’re doing it right.

What It Means to Pay a Nanny Legally

To pay a nanny legally, you must treat them as a household employee—not an independent contractor.

According to the IRS, a household employee is someone who works in your home and whose work you control (what they do and how they do it):
https://www.irs.gov/publications/p926

  • You set their schedule and responsibilities
  • You pay them as an employee
  • You handle payroll taxes and reporting

Issuing a 1099 instead of a W-2 is typically incorrect for nannies and can lead to compliance issues.

Why It’s Important to Pay Your Nanny Legally

Choosing to pay legally isn’t just about following rules—it provides real protections.

For You

  • Avoid penalties and back taxes
  • Stay compliant with IRS and state laws
  • Maintain clear financial records

For Your Nanny

  • Earn Social Security and Medicare credits
  • Qualify for unemployment benefits
  • Have verifiable income

Understanding the “Nanny Tax”

The term “nanny tax” refers to the payroll taxes required when you employ someone in your home.

When Do Nanny Taxes Apply?

According to the IRS:

https://www.irs.gov/taxtopics/tc756

  • If you pay about $3,000 or more per year → FICA taxes apply
  • If you pay $1,000 or more in a quarter → unemployment taxes may apply

What Taxes Are Included?

When you pay your nanny legally, you may be responsible for:

  • Social Security and Medicare (FICA)
  • Federal unemployment tax (FUTA)
  • State unemployment taxes
  • Optional income tax withholding

Step-by-Step: How to Pay Your Nanny Legally

1. Get an Employer Identification Number (EIN)

https://www.irs.gov/businesses/small-businesses-self-employed/get-an-employer-identification-number

This allows you to report and pay household employment taxes correctly.

2. Collect Employee Forms

Have your nanny complete:

  • Form W-4
  • State forms (if applicable)

IRS guidance on recordkeeping:
https://www.irs.gov/publications/p926

3. Run Payroll Each Pay Period

Each time you pay your nanny:

  • Track hours worked
  • Calculate gross pay
  • Withhold taxes
  • Provide net pay

4. Pay and Report Taxes

If you meet IRS thresholds, you must:

  • Withhold Social Security and Medicare taxes
  • Pay employer taxes
  • Submit payments to the IRS and state

Official IRS overview:
https://www.irs.gov/taxtopics/tc756

5. File Schedule H

Household employers must report nanny taxes using Schedule H:

https://www.irs.gov/forms-pubs/about-schedule-h-form-1040

This form is filed with your personal tax return.

6. Provide a W-2

At year-end, you must provide your nanny with a W-2 and file it with the Social Security Administration.

Tax Benefits for Families

When you pay your nanny legally, you may qualify for tax benefits.

The IRS allows families to claim the Child and Dependent Care Credit:

https://www.irs.gov/publications/p503

This can help offset the cost of childcare.

Common Mistakes to Avoid

  • Paying under the table
  • Misclassifying a nanny as a contractor
  • Not filing Schedule H
  • Waiting until tax time to handle payroll

The Easiest Way to Pay Your Nanny Legally

While you can do this yourself, many families choose a payroll service to simplify the process. Online payroll services have features that simplify the process. You can see here https://savvynannypayrollservices.com/features/.

  • Automatic payroll calculations
  • Tax payments each payroll
  • W-2 and Schedule H preparation
  • Direct deposit

At Savvy Nanny Payroll Services, we make it simple to pay your nanny legally—with automatic tax payments each payroll, unlimited payroll runs, and full-service support for $39/month. https://savvynannypayrollservices.com/signup/

 

 

Final Thoughts

Learning how to pay your nanny legally may feel overwhelming at first, but it becomes straightforward once you understand the steps.

By following IRS guidance and setting up a reliable system:

  • You stay compliant
  • You support your nanny
  • You avoid costly mistakes