Do You Have to Pay Nanny Taxes?
Quick version: yes, for most families. If you pay a nanny more than the annual threshold the IRS sets, you owe household employment taxes. Your nanny is an employee, not a contractor, so she gets a W-2 and not a 1099. Your side of it runs roughly 9 to 12 percent of wages, and a dependent care FSA plus the childcare tax credit often cover most of that.
The nanny tax is the question families ask me last, usually a week before someone starts, and it is the one that costs the most to get wrong. It is not actually a separate tax. It is Social Security, Medicare and unemployment tax on wages you paid to someone who works in your home.
I have placed household staff for twelve years and I will not dodge this one, because the families who set it up properly at the start are the families who still have the same nanny three years later. Here is who owes it, what you file, what it costs, and what you get back.
The short answer
If you pay a household worker more than the annual threshold the IRS sets, you owe household employment taxes on those wages. The threshold moves a little every year, so look up the current number in IRS Publication 926 before you decide you are under it.
In practice, a regular nanny in this area passes it inside the first two months. Even a part time nanny working two days a week usually passes it before the summer is out.
There is a second, lower trigger for federal unemployment tax, which currently applies once you pay $1,000 or more in household wages in any single calendar quarter. Most families cross that one first without noticing.
The teenager who sits for you on a Saturday night is a different case. Somebody working a handful of evenings a year is not a household payroll. What matters is how regular the work is and how much you pay, not the job title on the arrangement.
Your nanny is an employee, not a contractor
This is the mistake I see most often and it is the expensive one. You cannot hand your nanny a 1099 at the end of the year and call her self-employed.
The IRS treats a nanny as a household employee because you control the work. You set the hours, you decide where the work happens, and you decide what she does with your children and how she does it. A contractor sets her own hours, works for several clients at once, and brings her own plan and her own equipment.
The same test applies to the rest of the house. A house manager, an estate manager or a personal assistant you hire directly is your employee too, so household staffing roles come with the same obligations as a nanny does. A cleaning company that sends a different person each week is a different situation, because there you are buying a service from a business.
Getting this wrong is not a paperwork problem. If she files for unemployment after the job ends, the state sees how she was paid. Misclassification means back taxes, penalties and interest, and it lands on you rather than on her.
What you actually file and pay
There are fewer moving parts than it sounds like once you see them in one place.
| What | Who pays it | When |
|---|---|---|
| Social Security and Medicare | 7.65% from you, 7.65% withheld from her pay | Every pay period |
| Federal unemployment tax | You only | Once a year, with your own tax return |
| State unemployment tax | You only, in DC, Maryland and Virginia | Quarterly |
| Federal and state income tax withholding | Her money, held back by you | Optional at the federal level, and almost always worth doing |
| W-2 issued to your nanny | You issue it | By 31 January |
| Schedule H filed with your 1040 | You file it | With your annual tax return |
You will also need an employer identification number from the IRS and a registration with your state's unemployment agency. Both are one-time, both are free, and both take an afternoon at most.
Most families use a payroll service for the rest. In this area they run roughly $50 to $80 a month and they calculate the withholding, file the quarterly returns and produce the W-2 in January. To be clear about who does what: District Sitter places the nanny, and the payroll and tax filing stay with you or with the service you hire. Pick one before her first payday rather than after, because backdating three months of withholding is miserable.
What it costs, and what comes back
Your side is 7.65 percent of gross wages for Social Security and Medicare, plus federal and state unemployment tax, plus whatever the payroll service costs. On a nanny earning around $45,000 a year that comes to roughly $4,000 to $5,000 including the service.
Then there is what comes back, and this is the part families do not run the numbers on. A dependent care FSA through your employer lets you set aside pre-tax money for childcare, and you can only use it if your nanny is on the books with a Social Security number and a real employment record. The federal child and dependent care credit works the same way.
For a lot of families those two together cover most of what the employer taxes cost. Paying in cash gives up both of them. Once you count that, the cash saving is usually smaller than the tax bill you thought you were avoiding, and you are carrying the risk on top.
Set the money aside as you go rather than finding it in April. Take the employer share out on every payday and put it somewhere you will not spend it. If you wait until the return is due, the whole bill arrives at once.
What it gets your nanny
She earns Social Security and Medicare credits for every year she works for you. A nanny paid in cash for fifteen years arrives at retirement with a hole in her record that she cannot go back and fill.
She can claim unemployment if the job ends through no fault of her own. That matters in this line of work, where jobs end because a family relocates for a posting or a job change rather than because anybody did anything wrong.
She can prove her income. Try renting an apartment in this area or getting a car loan without a pay stub. A nanny on a W-2 can do both. A nanny paid in cash cannot, and it is one of the main reasons experienced candidates turn down otherwise good jobs.
When families ask me whether it is worth the trouble, I tell them the same thing every time. Staff who are paid properly stay longer, because a documented job is worth more to them than an undocumented one at the same rate.
DC, Maryland and Virginia each add a step
The federal rules are the same everywhere. The state layer is not, and in this metro most families live within twenty minutes of all three sets of rules.
- Washington, DC: register with the DC Department of Employment Services for unemployment insurance, and check the District's paid family leave contribution, which applies to household employers.
- Maryland: register with the Maryland Division of Unemployment Insurance and set up state income tax withholding.
- Virginia: register with the Virginia Employment Commission and set up state withholding.
The state that matters is where the work happens, not where you work. Families hiring silver spring nannies for a house in Montgomery County register in Maryland, even if their own office is downtown. Families hiring falls church babysitters for a house in Fairfax County register in Virginia. A family in Dupont Circle files with the District.
If you move across a state line mid-year, or if your nanny works in two of these places in the same week, ask an accountant rather than guessing. That situation is common here and the answer depends on details.
Rules change. Check your registration and your rate each January instead of assuming last year's setup carries over.
Next step
None of this is a reason not to hire. Pick a payroll service before you make an offer and the whole thing turns into a monthly line item you stop thinking about by March.
We place the nanny, and we can tell you what an on-the-books rate looks like for the hours you need, so the number you offer already accounts for what comes out of it. Call 202-415-7033 or use the contact form on our site.
One thing to be clear about: we are not accountants and this is not tax advice for your situation. Read IRS Publication 926 and talk to a payroll provider or a CPA before your first payday.
