How to Pay a Nanny Legally—and Why It Matters More Than You Think

A clear, practical guide to paying your nanny legally, from understanding nanny tax and W-2 classification to setting up payroll the right way so you as an employer stay compliant and build a strong, professional working relationship with your employee.

For many families, paying a nanny under the table in cash seems like the easiest path forward: less paperwork and fewer decisions. There’s no need to file taxes, declare earnings or set up complicated payroll systems. But, what seems easier in the moment can create real financial and legal risks for both you and your nanny down the line. 

And, while the mental hurdle of administration seems daunting, the reality is that once you hire a nanny, you become both a manager and employer. This means that paying a nanny legally, which protects both you and your employee, is required by law as a household employer. 

If you’re wondering how to pay a nanny on the books (and why it matters), you’re in the right place. We’ll walk you through exactly how to do it—so you can feel confident, compliant, and set up for a successful working relationship from day one.

Ready to set up legal payroll for your household employer? Learn more about our payroll services here. 

What It Means to Pay a Nanny Legally

If you’re researching how to pay a nanny legally, you’ll likely come across phrases like “on the books,” “under the table” and “over the table”. Simply put, paying a nanny on the books or legally means treating your nanny as a household employee. Think of them like any other employee at a regulated business: employers run payroll, withhold and pay required taxes, and report their employees wages to the IRS and your state. If you were the owner of a bookstore, you would classify your employees as W-2 employees and pay them via a payroll system.

How the IRS Classifies Household Employees

One of the biggest mistakes families make is treating a nanny as an independent contractor and issuing a 1099. If you control when, where, and how the work is performed, your nanny is generally considered a household employee and should be paid as a W-2 employee, not a contractor. Misclassification can result in back taxes, interest, and penalties.

The IRS determines worker classification using Common Law Rules, which focus on three main categories:

• Behavioral Control: Who directs how the work is done?
• Financial Control: Who controls payment, expenses, and tools?
• Type of Relationship: Is the relationship ongoing and integral to the household?

For household employment specifically, the IRS states that if you control what work is done and how it is done, the worker is your employee—not an independent contractor. This is why most nannies fall squarely into the W-2 category.

I-9 Employment Eligibility Verification

Like any employer, families are responsible for verifying that their nanny is legally authorized to work in the United States by completing Form I-9 and reviewing acceptable identification documents.

State Laws Can Add Additional Complications

It’s worth nothing that Federal IRS classification is just the starting point. Many states have their own household employment laws that go further than federal requirements, covering paid sick leave, overtime rules, pay frequency, and termination notice. When state and federal standards differ, the more protective standard for the employee is what applies. For example, California, New York, Illinois, and Massachusetts are among the states with the most expansive domestic worker protections, but requirements vary significantly by location. Before you bring someone on, it’s worth understanding what your state requires because compliance is both a federal and state conversation.

Are Nannies Employees or Independent Contractors?

Based on the IRS guardrails for classification, nannies are considered W-2 household employees and not independent contractors. This distinction comes down to your control over their responsibilities and required work hours. If you set your nanny’s schedule, outline their responsibilities, and provide the environment in which they work, they are legally classified as an employee.

Paying a nanny like a contractor (for example, issuing a 1099) may seem simpler, but it doesn’t align with federal guidelines for household employment. Paying a nanny legally means classifying them correctly from the start and handling payroll, tax withholding, and year-end reporting accordingly—including navigating nanny tax requirements. Here’s a breakdown explaining W-2 vs 1099 classification:

W-2 vs. 1099 for Household Employees

Category	W-2 Household Employee (Nanny)	1099 Independent Contractor
Who Controls the Work	Family sets schedule, duties, and how work is performed	Worker controls how, when, and where work is done
IRS Classification	Household employee	Self-employed individual
Payroll Responsibility	Family runs payroll and issues a W-2	Worker invoices family; family may issue 1099-NEC if applicable
Tax Withholding	Employer withholds Social Security, Medicare, and potentially income taxes (“nanny tax”)	Worker pays their own self-employment taxes
Employer Tax Obligations	Employer pays employer portion of Social Security & Medicare; may pay federal/state unemployment taxes	No employer payroll taxes owed
Year-End Forms	W-2 provided to nanny; Schedule H filed with IRS	1099-NEC may be issued if criteria met
Benefits Eligibility	May include PTO, overtime, guaranteed hours (based on agreement and state law)	Not entitled to employee benefits
Legal Risk if Misclassified	Compliant when classified correctly	High risk: misclassifying a nanny as a contractor can lead to IRS penalties and back taxes

The Risks of Paying a Nanny Under the Table

Paying a nanny under the table—meaning off the books, without reporting wages or paying taxes—can feel easier in the short term. Afterall, you see other families do it, so why shouldn’t you? Before going that route, it’s important to understand that paying under the table comes with meaningful risks. Families may face penalties, back taxes, or legal complications if employment is ever reviewed or audited.

There are also real implications for your nanny. Without reported income, they may have difficulty qualifying for loans, building credit, or accessing benefits like unemployment or Social Security.

Paying a nanny on the books keeps you as their employer compliant, and also creates a transparent, professional relationship that protects both your family and your nanny over time.

How to Set Up Payroll for Your Nanny

Once you understand how to pay a nanny legally, the next step is putting a simple, repeatable system in place. Setting up payroll might sound like a heavy lift, but in practice, it’s a series of straightforward steps that ensure you’re paying your nanny on the books—and staying compliant from day one. And, a lot of the admin work you’ll do to set up payroll is done on the frontend, meaning you won’t have to go through every step annually. For example, you’ll only need to get an EIN number once.

Here’s how to get started:

Step 1: Get an EIN
Before you can run payroll, you’ll need an Employer Identification Number (EIN) from the IRS. Think of this as your household employer ID. This unique number is what you’ll use to report taxes and file the appropriate forms. Here’s the direct link to the IRS to get started. 

Step 2: Open and/or Register with Your State
As an employer, you must register and/or open a state employer account before remitting any payment, and most states require this before or shortly after your employee’s first day. Depending on where you live, unemployment insurance, income tax withholding, and paid family leave may each require a separate registration and filing portal. Our payroll system handles state account registration as part of onboarding so you’re not navigating each state’s system on your own.

Step 2: Classify Your Employee Correctly
As covered above, most nannies are W-2 household employees. Correct classification is foundational to paying a nanny legally and avoiding issues down the line. This determines how you handle taxes, payroll, and reporting.

Step 3: Set Up a Payroll System
Next, you’ll choose how you want to manage payroll. Some families handle this manually, but many opt for a household payroll service to automate calculations, tax filings, and pay schedules. The goal is consistency: paying your nanny accurately and on time, every time.

Step 4: Withhold and Pay Taxes
Each pay period, you’ll withhold applicable taxes (like Social Security and Medicare) and set aside employer contributions. Depending on your setup, these taxes are paid quarterly or annually. This is a core part of managing nanny tax obligations.

Step 5: File Required Forms
At year-end, you’ll provide your nanny with a W-2 and file the necessary paperwork with the IRS. As mentioned above, Schedule H must be filed by you as the employer alongside your personal tax returns—this form cannot be filed by your payroll provider. 

Setting up payroll is one of the most important parts of actually paying a nanny on the books, but it doesn’t have to become your second job. Many families, especially those who are first-time employers, choose to partner with a payroll provider to handle the details, reduce risk, and save time.

Common Payroll Mistakes Families Make

Some of the most common mistakes we see when families set up payroll is a misalignment between what is agreed upon and in writing and what is in payroll. Here are a few things to be aware of and avoid: 

Mismatch Between Agreement and Payroll

Your work agreement should be the foundation of your payroll—not a separate document that lives in a drawer. If you’ve agreed to guaranteed hours, a set weekly rate, or specific benefits like health insurance, your payroll should reflect that consistently. When families default to paying only for “hours worked,” it can unintentionally undermine the terms of employment.

Overlooking Guaranteed Hours

Guaranteed hours are a standard benefit in professional nanny roles, providing income stability for your nanny and consistent coverage for your family. A common mistake is treating guaranteed hours as optional or adjusting pay week-to-week. Paying a nanny on the books means honoring those agreed-upon wages, regardless of minor schedule changes.

Missing Overtime Requirements

Overtime compliance is one of the most frequently overlooked aspects of nanny payroll. If your nanny works beyond 40 hours in a week (or meets state-specific thresholds), those hours must be paid at the appropriate overtime rate. Failing to account for this—even unintentionally—can create legal exposure and erode trust between you and your employee. 

Inconsistent PTO and Benefits Tracking

Paid time off, sick days, and other benefits should be clearly tracked and accurately reflected in both payroll and your work agreement. Without a system and the correct documentation in place, it’s easy for details to slip through the cracks, leading to discrepancies or misunderstandings down the line.

The Easiest Way to Pay a Nanny Legally

It’s normal to feel apprehensive about paying a nanny legally and the administrative work that comes along with it. But once your nanny is classified correctly and your payroll is set up, the payroll process becomes far more manageable and automatic than most families expect.

With the right systems in place from the start, paying a nanny on the books becomes part of your routine—and an expected industry standard. As an employer, it ensures you’re compliant with nanny tax requirements.

For many families, the easiest way to set up payroll is by partnering with a trusted payroll provider. Instead of navigating filings, calculations, and deadlines on your own, you can rely on expert support to handle the details accurately and on time.

At Hello Nanny!, we believe paying a nanny legally shouldn’t feel overwhelming or be overlooked. From helping you hire the right caregiver to guiding you through payroll and compliance, we’re here to make the process seamless—so you can focus on what matters most: your family.

Ready to set up legal payroll for your household employer? Learn more about our payroll services here. 

FAQs

How do you pay a nanny legally?

Paying a nanny legally means treating them as a household employee, which includes running payroll, withholding and paying taxes, and issuing a W-2 at year-end. Paying a nanny legally is how the pay is documented and reported to the IRS and often means that families turn to payroll providers to streamline the payroll process for them.

Can I pay my nanny in cash?

Yes. You can pay your nanny in cash, but the wages must still be reported and handled through payroll. Paying “under the table” without proper tax reporting and documentation may result in compliance issues.

What is the nanny tax? 

The nanny tax refers to the payroll taxes and reporting requirements families are responsible for when they hire a household employee. This typically includes Social Security, Medicare, and unemployment taxes, as well as providing a Form W-2 to the employee.

Do I need to report babysitting income? 

If the work is occasional, reporting requirements may differ, but regular, ongoing childcare typically qualifies as household employment and must be reported. When in doubt, it’s best to err on the side of reporting income properly. Always consult your CPA or tax advisor with specific questions about your unique situation. 

I’m already paying my nanny under the table. Is it too late to set up payroll?

No. Many families switch to payroll after getting started. Setting up payroll now can help you become compliant and avoid potential issues down the road. For questions about prior payments, consult your CPA or tax advisor.

Can I pay my nanny as a W-2 employee with Zelle or Venmo?

Yes. You can use payment apps such as Zelle, Venmo, Cash App, or PayPal to pay your nanny’s wages. However, the payment method does not replace your payroll responsibilities. You must still:

• Classify the nanny as a W-2 employee (if they meet IRS household employee rules)
• Process payroll and calculate any required taxes
• Withhold and remit applicable taxes
• Maintain payroll records and pay stubs
• Issue a Form W-2 at year-end

Payment apps simply transfer the money. Payroll, tax withholding, and reporting requirements still apply.