Household Employees and the Nanny Tax: What to Know in 2026

You probably thought you only needed to worry about the so-called “Nanny Tax” if you were running for public office and facing a pesky reporter at a political rally. Think again. The Nanny Tax, also known as the household employee tax, can apply to nannies, housekeepers, maids, babysitters, gardeners, and other people working in or around your home. If you’ve hired help around your household, you need to know whether that worker is actually your employee, what taxes you may owe, and what paperwork you're responsible for. Ignore it, and that household employee could cost you A LOT more than you realized.

Step 1: Determine if the Nanny Tax Applies to You

First, the “Nanny Tax” isn't really a special tax just for nannies. It's the nickname commonly used for the federal employment taxes that can apply when you employ someone to perform household work. The critical question is whether the person working in your home is a household employee or an independent contractor.

Generally, you have a household employee when you hire someone to perform household work and you control not only what work is performed, but how that work is performed. It doesn't matter whether the person works full time or part time, whether you pay hourly or by the job, or even whether you originally found the worker through an agency.

An independent contractor is different. They're generally in business for themselves and control how the work gets done. They may provide their own tools and equipment, offer their services to multiple customers, and operate an independent business. So your landscaping company that shows up with its own crew, equipment, and schedule is almost always an independent contractor. The nanny who comes to your house five days a week, follows your instructions, and uses the supplies you provide is probably your employee.

This distinction matters. You don't get to call someone an independent contractor just because it's easier than dealing with payroll.

The $3,000 Rule for 2026

Here's the number you need to know for 2026. If you pay $3,000 or more in cash wages during 2026 to any one household employee, you generally need to withhold and pay Social Security and Medicare taxes on those wages. The combined FICA rate is 15.3%, with 7.65% generally attributable to the employee and 7.65% to you as the employer. You can choose to pay the employee's portion yourself rather than withholding it from their wages.

There are special exceptions for certain wages paid to your spouse, your child under age 21, your parent, and an employee under age 18. Those exceptions have their own qualifications, so don't assume that every family member or teenager working in your home is automatically covered by the same rule.

Step 2: Determine and Budget for How Much the Tax May Cost

Hopefully, you're reading this before you hire someone. That way you can calculate the real cost of the employee and build it into your budget. There are several costs you need to consider.

1. FICA: Social Security and Medicare

For 2026, Social Security is 6.2% for the employee and 6.2% for the employer. Medicare is another 1.45% each, bringing the combined FICA tax to 15.3%.

Normally, you withhold the employee's 7.65% share from their wages and pay another 7.65% yourself. But a lot of household employers don't want to reduce the nanny's agreed-upon take-home pay. You can choose to pay their 7.65% share yourself. Just understand that you're increasing the real cost of hiring that employee, and the taxes you pay on their behalf have additional reporting consequences.

That's why I want you budgeting for this before agreeing to compensation.

2. FUTA: Federal Unemployment Tax

Federal unemployment tax is another potential expense. For 2026, the FUTA rules generally come into play if you pay $1,000 or more in total cash wages to household employees during any calendar quarter in 2025 or 2026. FUTA is calculated at 6% on the first $7,000 of FUTA wages paid to each employee, although you may receive a credit of up to 5.4% for qualifying state unemployment contributions. That can reduce the effective federal rate substantially.

And remember, FUTA is an employer tax. Don't withhold it from your household employee's wages.

3. State Unemployment Taxes

Then we have state unemployment taxes, and this is where I can't give you one national answer. Requirements and rates vary from state to state. You need to determine what your state requires when you hire a household employee and factor that into your budget.

4. Workers' Compensation Insurance

Finally, don't forget workers' compensation. States vary dramatically on whether workers' compensation coverage is required for household employees and when those requirements kick in. But even if your state doesn't require a separate policy, don't ignore the issue.

Call your homeowners insurance carrier and ask the question: What happens if my nanny, housekeeper, or other household employee gets seriously hurt while working on my property? You don't want to learn the answer after the accident.

Step 3: Gather Information From Your Worker Before They Start

Once you've determined that you're hiring a household employee, treat the relationship professionally from day one.

First, you'll need to verify that the individual is authorized to work in the United States. That's where Form I-9, Employment Eligibility Verification, comes in. You review the required documentation and keep the completed I-9 in your records. You don't routinely submit the I-9 to the IRS or USCIS.

You'll also want the employee's correct name, address, and Social Security number for your payroll and year-end reporting.

If your employee wants you to withhold federal income tax, have them complete Form W-4. Here's an important distinction: you're generally not required to withhold federal income tax from a household employee's wages. You can do so if the employee asks and you agree. That's separate from your Social Security and Medicare responsibilities.

You'll also need an Employer Identification Number (EIN). Don't use your Social Security number in place of an EIN for the required household-employer reporting. If you already have an EIN from previously employing workers or operating a sole proprietorship, you may already have what you need.

Finally, check your state's requirements. You may have state registration, withholding, unemployment, workers' compensation, or new-hire reporting obligations in addition to the federal rules.

Get this information before your household employee starts working. It's much easier to establish the relationship correctly from day one than to chase down paperwork a year later.

Step 4: Decide How You're Going to Handle Payroll

Now comes the part most people don't want to deal with: actually administering the payroll.

Option A: Use a Payroll Service

Getting identification numbers, calculating withholding, tracking wages, making payments, filing forms, and staying on top of state requirements can become a handful.

That's why I generally like using a payroll provider, particularly if you're paying a household employee regularly. There are payroll companies that specialize in household employment, and many accountants and payroll professionals can also handle the process.

You don't need to become a payroll expert on the weekends just to save a few hundred bucks. A good service can help calculate the appropriate withholding, handle direct deposits, track state requirements, and prepare year-end reporting. You still need to provide accurate information and understand what you're paying, but you're not trying to remember every filing deadline yourself.

Option B: Handle It Yourself

Of course, some of you are DIYers. That's okay.

You can handle household payroll yourself, but don't confuse “I can do this myself” with “there aren't any rules.” You'll still need to properly track wages and taxes, satisfy applicable state requirements, provide required forms, and maintain adequate records.

If you're going this route, use reliable payroll or accounting software and stay organized throughout the year.

What About Schedule H?

For many household employers, federal household employment taxes are ultimately reported on Schedule H (Form 1040) with the individual federal income tax return. Schedule H calculates applicable Social Security, Medicare, FUTA, and any federal income tax you've agreed to withhold. For 2026 taxes, Schedule H is generally filed with your 2026 return in 2027.

But don't interpret that to mean you can completely ignore the tax liability until tax season. Household employment taxes increase the amount you'll owe with your federal return, and the IRS specifically warns that you may need additional withholding or estimated tax payments during the year to avoid an underpayment penalty.

In other words, Schedule H simplifies the federal reporting process. It doesn't make the tax disappear.

What Forms Do Household Employers Need?

There are several forms you should know about:

• Form I-9: Used to verify the employee's identity and authorization to work in the United States.
• Form W-4: Used if you and your household employee agree to federal income tax withholding.
• Form W-2: For 2026, you'll generally need to issue a W-2 if you paid a household employee at least $3,000 in Social Security and Medicare wages or withheld federal income tax.
• Form W-3: Used to transmit W-2 information to the Social Security Administration.
• Schedule H (Form 1040): Used by many household employers to calculate and report household employment taxes.
• State forms: Depending on where you live, additional unemployment, withholding, workers' compensation, and employment forms may apply.

For 2026 Forms W-2 and W-3, the IRS says the filing deadline with the Social Security Administration is February 1, 2027, and the employee's required W-2 copies are due by that date as well.

What's the Risk of Paying Cash “Under the Table”?

You may presume you can pay your nanny, landscaper, or maid “under the table” and it's no big deal. They just want cash and don't care...so you may think.

But what happens when that worker leaves and files for unemployment? What happens when they need documented income to qualify for a loan or decide to properly report their income? What happens when a state or federal agency starts asking where those wages came from? All of a sudden, you're on the radar, and now you may be looking at back taxes, penalties, interest, corrected filings, and potentially state employment problems. And that may be the least of your worries.

What happens if your household employee gets seriously hurt on your property and you discover that you should have been carrying workers' compensation coverage or that your homeowners policy doesn't cover the claim the way you assumed? Now you're living in a nightmare.

Paying somebody in cash isn't inherently the problem. Failing to properly classify, report, and pay the applicable taxes on those wages is the problem.

Is This Whole Mess a Tax Deduction?

Generally, hiring someone to perform personal household services doesn't suddenly turn those expenses into a business deduction simply because having a nanny, housekeeper, or gardener makes your life easier or gives you more time to work. But there's an important distinction when we're talking about childcare.

If you pay someone to care for a qualifying child or another qualifying individual so that you and your spouse, if applicable, can work or look for work, some of those expenses may qualify for the Child and Dependent Care Credit. This is different from the Child Tax Credit.

For the Child and Dependent Care Credit, qualifying expenses are generally limited to $3,000 for one qualifying individual or $6,000 for two or more, and the percentage of those expenses that becomes a credit depends on your income. You claim the credit using Form 2441.

Don't assume that means your entire nanny salary suddenly becomes deductible. The rules determine which expenses qualify, who qualifies for care, who can be the care provider, and how much can actually be used to calculate the credit.

Keep Good Records

Be sure to keep careful employment records for every household employee. At a minimum, your records should document things such as:

• Employee name, address, and Social Security number
• Employment dates
• Dates and amounts of wages paid
• Applicable Social Security and Medicare taxes
• Taxes you've paid on behalf of the employee
• Copies of Forms W-2, W-4, I-9, Schedule H, and other applicable employment records
• Relevant state filings and tax payments

For federal household employment taxes, the IRS says to keep your employment tax records for at least four years after the due date of the return on which you report the taxes or the date the taxes were paid, whichever is later.

Don't treat recordkeeping as an afterthought. If you're ever questioned about how the worker was paid or whether the proper taxes were handled, good documentation can make a huge difference.

The Bottom Line

If you're going to hire a nanny, housekeeper, gardener, or other household employee, do it right. Determine whether they're truly an employee, understand the real cost before you hire them, collect the proper information, handle the taxes and reporting correctly, and make sure you have the appropriate insurance in place. Don't ignore the issue because the arrangement feels informal. That “worker” may cost you A LOT more than you realized if you don't record and report it properly.

If you’re paying a nanny or other household employees, getting the payroll right is only the beginning. There may be smarter ways to structure those costs, avoid expensive tax mistakes, and take advantage of tax-saving opportunities you’re missing elsewhere. My team at KKOS Lawyers can look at how you’re paying household employees alongside your businesses, investments, real estate, retirement accounts, and overall tax picture to find where more of your money could legally stay with you. Don’t wait another tax year to discover how much you’ve been leaving on the table. Book a Comprehensive Tax Consultation with my team at KKOS Lawyers and start putting those tax savings to work for you.

Frequently Asked Questions

What is the Nanny Tax?

The “Nanny Tax” refers to employment taxes that may apply when you hire a nanny, housekeeper, babysitter, gardener, or other household employee.

How much can I pay a household employee without paying the Nanny Tax?

If you pay $3,000 or more in cash wages to one household employee in 2026, Social Security and Medicare taxes generally apply.

Is my nanny an employee or an independent contractor?

If you control both what work is performed and how it’s done, your nanny is generally a household employee rather than an independent contractor.

Do I have to withhold federal income tax from my nanny?

Generally, no. You can withhold federal income tax if your employee requests it and you agree.

Can I pay my nanny in cash?

Yes, but paying cash doesn’t eliminate your tax or reporting obligations.

Does my nanny get a W-2 or 1099?

A household employee generally receives a W-2 when the applicable reporting requirements are met. A true independent contractor may receive a 1099.

Can I deduct what I pay my nanny?

Generally, nanny wages are personal expenses, not business deductions. However, qualifying childcare expenses may be eligible for the Child and Dependent Care Credit.

What happens if I don’t report my household employee?

You could face back taxes, penalties, interest, and state employment issues. Problems can also surface if the employee later files for unemployment or another benefit.