The nanny tax: when your babysitter becomes your employee

Somewhere between 'the teenager who babysits on Saturdays' and 'the full-time nanny' a legal line gets crossed, and most families cross it without noticing: you become a household employer, with Social Security, Medicare, and unemployment tax obligations. It's nicknamed the nanny tax, it applies to far more than nannies, and the compliance rate is famously terrible — which doesn't make ignoring it any less risky, especially for the worker who's quietly losing benefits.

Who counts as a household employee

The test is control: if you decide what work is done and how — set the hours, give the instructions, provide the workplace — the person is your employee. That covers nannies, regular housekeepers, home health aides you hire directly, gardeners on your schedule, and full-time babysitters. It does NOT cover genuinely independent businesses: the cleaning company that sends a rotating crew, the agency that employs the caregiver, or the self-employed landscaper with his own equipment and twenty clients. You can't make an employee a contractor by handing them a 1099 — the IRS is explicit that household workers under your control are employees.

The thresholds and what you owe

• FICA (Social Security and Medicare): owed once you pay any one worker $2,800 or more in a year (2025 threshold; it inflation-adjusts). The tax is 15.3% of wages — 7.65% withheld from the employee, 7.65% out of your pocket.
• Federal unemployment (FUTA): owed once you pay $1,000+ in any calendar quarter — 6% of the first $7,000 of wages, mostly offset by a credit to an effective 0.6% ($42/year max) if you pay state unemployment on time.
• State obligations: state unemployment insurance, and in some states disability insurance and paid family leave contributions. Rules and registration vary by state.
• Income tax withholding: optional for household employers — the employee can handle their own via estimated payments — but many workers prefer you withhold.
• Exceptions: wages to your spouse, your parent (usually), your child under 21, or a babysitter under 18 whose principal occupation is being a student generally don't trigger FICA.

The actual paperwork, start to finish

1. Get an EIN from IRS.gov (free, ten minutes) — you don't use your SSN for this.
2. Verify work eligibility with Form I-9 (keep it on file) and have the employee fill out a W-4 if you're withholding income tax.
3. Register with your state for unemployment insurance (and disability/PFL where applicable).
4. Each payday, withhold the employee's 7.65% FICA share and track your matching share; pay state unemployment on the state's schedule.
5. By late January, give the employee a W-2 and file it with the Social Security Administration.
6. File Schedule H with your own Form 1040, which rolls all the federal household employment taxes into your personal return — and bump your withholding or estimated payments during the year so it doesn't land as a surprise balance due.

The tax breaks that soften the bill

If the care lets you (and your spouse, if married) work, the wages are qualifying expenses for the dependent care FSA through your employer or the child and dependent care credit — but only if the caregiver is paid on the books, because both require the caregiver's tax ID on your return. This is the quiet irony of the nanny tax: for many two-earner families, the tax benefits of legal payroll cover most of the employer taxes.

The thresholds at a glance

A note on the gray areas: occasional babysitting by a neighborhood teenager stays comfortably outside the system (the under-18 student exception covers it), and a true shared-nanny arrangement makes BOTH families employers, each with their own thresholds and paperwork. Elder care is the fastest-growing version of this issue — families hiring a private caregiver for an aging parent routinely cross the threshold within weeks, and the same Schedule H rules apply, sometimes payable from the parent's own funds as the employer. If a care arrangement is regular, scheduled, and directed by you, assume the nanny tax applies and check the exceptions, not the reverse.

The bottom line

Cross $2,800 to any household worker in a year and you're an employer — that's the whole trigger. Get the EIN, run real payroll (ideally through a cheap service), file Schedule H, and claim the dependent-care tax breaks that legal payment unlocks. It costs less than families fear, protects the worker who takes care of your household, and converts an open-ended legal liability into a boring line on your tax return.