Nanny Pay, Taxes & Employment FAQ

Am I really an "employer" if I hire a nanny?

Almost certainly yes. Under IRS rules, if you control what work is done and how it is done in your home, your nanny is a household employee — not an independent contractor. That distinction matters: misclassifying a nanny as a contractor (handing over a 1099 instead of a W-2) is one of the most common and most costly mistakes families make. The IRS explains the test and every obligation that follows in Publication 926, the Household Employer's Tax Guide.

What is the "nanny tax"?

Shorthand for the employment taxes a household employer handles once wages cross the annual IRS threshold: the family and employee each pay half of Social Security and Medicare (FICA), the family pays federal unemployment tax (FUTA) and usually state unemployment tax, and the family may withhold federal income tax if both sides agree. You report and pay the federal pieces once a year with Schedule H, filed with your own Form 1040.

What do I actually have to set up?

• Federal Employer Identification Number (EIN) — free, ten minutes, directly from irs.gov.
• State registration — for state unemployment insurance and, in many states, new-hire reporting.
• Form I-9 — verify your nanny's eligibility to work in the United States and keep the form on file.
• Payroll — calculate withholding each pay period, give your nanny a pay stub, and issue a W-2 each January.
• Workers' compensation — required for household employers in a number of states; check your state's rules, as a rider on homeowner's insurance is often inexpensive.

If that list makes your eyes glaze over, a household payroll service will run all of it for a modest monthly fee — usually money well spent.

Why pay on the books at all?

Beyond the obvious legal answer, paying legally protects both sides. Your nanny earns Social Security credits, unemployment eligibility, and a verifiable income history for apartments, loans, and credit. You gain eligibility for the federal child and dependent care tax credit and dependent-care FSA dollars, freedom from back-tax exposure, and the simple ability to give a truthful reference when your wonderful nanny moves on someday. Experienced professional nannies increasingly decline off-the-books positions entirely — paying legally widens your candidate pool.

Does minimum wage and overtime law apply in my own home?

Yes. Domestic workers, including nannies, are covered by the Fair Labor Standards Act: at least minimum wage for all hours worked, and time-and-a-half overtime past 40 hours per week for live-out employees. Live-in employees must receive at least minimum wage for all hours worked, though federal overtime rules differ (and several states are stricter). The Department of Labor's domestic and direct-care worker pages lay out the federal rules; always check your state, which may exceed them.

How should we structure pay — hourly or salary?

Set an hourly rate, even if you communicate a weekly figure for convenience. Because overtime is calculated on the hourly rate, a "flat salary" that quietly assumes 50-hour weeks creates legal exposure and resentment. The cleanest pattern: a base hourly rate, a guaranteed minimum number of weekly hours (nannies plan their lives around your schedule, so guarantee it), and time-and-a-half for hours beyond the standard week. Put all of it in the work agreement.

What about raises, bonuses, and reviews?

The long-standing custom in professional households: an annual review with a cost-of-living raise (more for expanded duties or a new baby), plus a year-end bonus of one to two weeks' pay. None of it is legally required — all of it is retention. Replacing a beloved nanny costs far more than a thoughtful raise.

Do these rules apply to au pairs too?

Au pairs operate under the State Department's J-1 program, which sets its own weekly stipend formula, hour limits, and education requirements — see the official au pair program page. The trade-offs between the two models are covered in our hiring FAQ.