This guide walks families through everything they need to know about paying their nanny legally—from setting up payroll and understanding tax requirements to managing year-end filings with confidence. Whether you’re hiring for the first time or giving your payroll setup a much-needed refresh, we provide expert guidance to show you exactly how to pay your nanny and household staff the right (and legal) way.
Beyond finding a nanny that fits your family’s lifestyle, schedule, and values, many families often waffle between paying them legally (over the table) or illegally (directly—sometimes in cash— under the table).
This shouldn’t even be a point of discussion. Adhering to legal nanny payroll isn’t just the “right” thing to do, but the smartest way to protect your family, your caregiver, and the relationship you’re building together.
Families considering paying under the table assume that nanny payroll is complicated, expensive, or optional. (It’s none of those things.) They also might think it’s more advantageous to both parties if you pay under the table (again, it isn’t).
In reality, setting up legal pay is surprisingly straightforward once you know the steps, and it unlocks essential protections like unemployment insurance, workers’ comp, and documented income for your nanny.
Consider this your modern, no-nonsense guide to household employment: what you must do, what you shouldn’t do, and how to keep everything compliant, transparent, and stress-free (for everyone!) from day one.
👉Questions about how to pay your nanny legally or the best type of support for your lifestyle and budget? Reach out to our team so we can follow up with personalized guidance.
What Is the Nanny Tax?
According to the IRS, the “Nanny Tax” is triggered when you as the employer pay a household employee $2,800 or more in cash wages during the calendar year (for 2025). This threshold can fluctuate from year to year, so check with your tax advisor or CPA to confirm this wage. These taxes include Social Security, Medicare, Federal Unemployment Tax (FUTA), as well as potential state taxes.
In short, once you cross that annual wage threshold, you’re officially responsible for withholding and remitting these taxes—an essential step in staying compliant and protecting both your family and your nanny.
Failure to pay the nanny tax and not complying with these household employment taxes can result in large financial penalties, like back taxes, interest, and fines that on average can total up to $25,000, and potential criminal charges.
Related: The Benefits of Having a Nanny
The Benefits of Paying Your Nanny Over the Table
While you may think it’s convenient to pay your nanny without any deductions (I mean, who wouldn’t love a direct payment, you think?!), it’s not actually as advantageous for them to accept cash as opposed to being paid through payroll.
One significant drawback of paying a nanny under the table is that it often results in the nanny not paying into crucial government programs such as unemployment, Social Security, and Medicare. By paying your nanny this way, they may not have the necessary contributions deducted from their wages, which can have long-term implications for their financial security and put you at risk as their employer.
Here are a few reasons why paying a nanny through a legal nanny payroll is beneficial for both the nanny and the family:
Legal Compliance
Paying your nanny through payroll ensures compliance with federal and state employment laws. It helps you adhere to tax regulations, wage and hour laws, and other obligations that protect both parties involved in the employment relationship. It also establishes a transparent and professional employment arrangement.
Social Security and Medicare
Regular payroll deductions allow the nanny to contribute to Social Security and Medicare, which are essential for their retirement and healthcare benefits. These programs provide a safety net and financial security for the future.
Unemployment Benefits
By paying taxes and contributing to the unemployment insurance program, nannies can qualify for unemployment benefits in case of unexpected job loss or termination. This provides them with temporary financial assistance during periods of unemployment and helps them transition to their next employment opportunity.
Financial Planning
Accepting payment through payroll allows the nanny to establish a documented employment history, which can be crucial for future financial planning. It enables them to build a credit history, apply for loans or mortgages, and access other financial services that require proof of income.
Employer Contributions
Payroll systems often include employer contributions, such as the employer’s portion of Social Security and Medicare taxes. These contributions are an additional benefit for the nanny and can help offset the cost of their employment benefits, such as health insurance or retirement plans.
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How to Set Up Payroll for Your Nanny—and Pay Your Nanny Legally
1. Obtain an Employer Identification Number (EIN) from the IRS
Kind of like your unique social security number, a federal employer tax ID identifies you as an employer and you’ll need this when you file federal and state taxes.
2. Have your nanny or household employee complete a Form I-9
Ask your nanny or household staff to complete an eligibility verification form (Form I-9) to verify they are legally allowed to work in the U.S. Remember that this form is not submitted to the government unless requested. You keep this form for your records.
3. Ask your nanny or household employee to complete withholding designations
Just like any other salaried job, you’ll need your nanny or household staff to complete their withholding elections in a Form W-4 and state forms, which determines whether (and how much) income tax is withheld. Withholding income tax is always optional; however, doing so is usually recommended. If your nanny has any questions about what to do, we suggest reaching out to their nanny agency or their own CPA or financial planner.
4. Register with your state payroll or tax agency
Next, you’ll want to ensure that you’re registered with the correct state agency. For example, in California, you will register with the California Employment Development Department. This is necessary to report wages with holdings and pay state-level taxes like SDI unemployment, etc., as required by law.
5. Mutually execute a written employment agreement
An employment agreement, which outlines hours, duties, pay rates, PTO benefits, and more, is table stakes in any employer/nanny relationship. This helps clarify expectations, demonstrates professionalism, and provides legal compliance. Should you have questions about drafting a contract or need a template, reach out to Hello Nanny! or check out our attorney-drafted contract that you can customize to your family’s specific needs.
Related: Nanny Contracts: Everything You Need to Know
Common Mistakes When Paying a Nanny
Beyond setting your nanny and yourself up for success and ensuring legal compliance on both ends. Here are a few common mistakes and misconceptions in paying through a legal nanny payroll.
Your nanny is an employee, not an independent contractor
Generally speaking, having your nanny as a 1099 independent contractor is generally not allowed. According to law and IRS interpretation, most nannies should be classified as employees and therefore fill out a Form W-4 to formalize this. Of course, check with your CPA, financial advisor or preferred payroll advisor to confirm (we recommend starting here).
Don’t put your nanny on your business payroll
According to the International Nanny Association (INA), “Sole Proprietorships and For-Profit Farms may report and pay their nanny’s payroll taxes through their regular reporting, however it is not recommended.” Mixing your business payroll with your household payroll can open you up to potential legal risks.
Document everything
Becoming an employer also comes with a fair amount of paperwork. However, ensuring correct documentation now can prevent future headaches. Make sure that you formalize and document contracts, pay stubs, tax forms, and more. We also suggest digitizing all of your documents.
Don’t Forget end of year filings
Once you set up your legal nanny payroll, you’re not quite done. At the end of each calendar year, household employers must finalize several key documents to close out their nanny’s wages and taxes. This includes preparing and providing your nanny with a Form W-2, submitting the corresponding Form W-3 to the Social Security Administration, and completing Schedule H as part of your personal tax return. Depending on your state, you may also need to file annual or quarterly payroll summaries. These forms ensure accurate reporting, proper tax crediting, and a clean paper trail—so your nanny gets the benefits they’ve earned, and your household stays fully compliant.
Related: 11 Standard Nanny Benefits You Didn’t Know
Implementing Nanny Payroll
Complying with a legal nanny payroll can be done a few separate ways. There are a handful of payroll service providers who specialize in household staff payroll (here is our preferred provider). Below is a few ways to do it, depending on how hands-on (or hands-off) you want to be:
DIY approach
You handle payroll entirely yourself, including:
- Securing an EIN
- Registering with your state
- Maintaining records
- Doing the paychecks
- Filing all of the necessary end-of-year forms and returns
This is a great option for employers who are comfortable with accounting, payroll law, and bookkeeping. You certainly don’t need to be a formally trained bookkeeper to manage your nanny’s payroll yourself and while it can be time-consuming, this is the most affordable option.
Use a professional household-payroll service
There are specific payroll services tailored to nanny taxes. They handle the paperwork, remittances, quarterly filings, and more. The upside of using a specialized service is it’s hands-off, meaning it will save you time and ensure you are 100% compliant. While there is less risk involved, using a service does come with a monthly and often initial setup fee. For many families, this cost is worth peace of mind. Check out our preferred payroll provider here.
Hybrid Approach
It is possible to take on a hybrid approach. For example, some families use a payroll service only for parts of the process, like quarterly or state filings, but they manage the direct paychecks themselves.
👉Not sure where to begin? Our intake form helps us learn exactly what your family needs. Start here.
A Strong Partnership Begins with a Foolproof Legal Foundation
Paying your nanny legally isn’t just a box to check or a “nice-to-have.” Enrolling your nanny or household staff in official payroll demonstrates professionalism, respect, and a commitment to a transparent, lasting working relationship.
And, as the employer, complying with nanny tax laws protects your household and assets from costly penalties, supports your nanny’s long-term financial security, and elevates the professional standard for in-home childcare. With the right setup, clear documentation, and a payroll system that fits your comfort level, legal pay becomes simple, sustainable, and stress-free. We encourage you to explore payroll options and consult with a tax professional or a payroll service provider (here’s our recommendation) to ensure that your nanny is compensated in a fair and compliant manner.
It’s one of the most meaningful investments you can make in your nanny—and in the well-being of your family.
Legal Nanny Payroll FAQs
1. Do I really have to pay nanny taxes?
Yes. If you pay a household employee $2,800 or more in cash wages for 2025, the IRS considers you a household employer. That means Social Security, Medicare, and unemployment taxes apply. Paying under the table isn’t legal and can expose your family to fines, back taxes, and penalties.
2. Can my nanny be classified as an independent contractor (1099)?
No, this is not recommended. In nearly all cases, nannies are employees, not contractors. You control their schedule, responsibilities, and work environment, which meets the IRS definition of an employee. That means they must be paid via W-2, not 1099.
3. Is paying my nanny legally more expensive?
Not necessarily. Yes, you’ll pay the employer’s share of taxes, but the long-term benefits—legal protection, reduced risk, a more stable employer–employee relationship—far outweigh the cost. Plus, many payroll providers streamline the process and help prevent expensive mistakes.
4. What happens if I pay under the table and get caught?
Families can face back taxes, interest, fines that often total up to $25,000 or more, and potential criminal charges. Nannies may also lose access to unemployment benefits, Social Security credits, and documented income. It’s a lose-lose situation for both sides.
5. How does legal payroll benefit my nanny?
Legal pay gives your nanny documented income, unemployment insurance, contributions toward Social Security and Medicare, and a clean employment history. This helps them qualify for housing, loans, credit, and future jobs. It also reinforces professionalism and stability within the relationship.
6. What paperwork do I need from my nanny?
At a minimum, you’ll need:
- Form I-9 for employment eligibility
- Form W-4 for federal income tax withholding
- State withholding forms (varies by state)
These stay in your files and not turned over to the government unless requested by an agency or auditor.
7. What do I need to do at the end of the year?
You must provide your nanny with a W-2, file a W-3 with the SSA, and submit Schedule H with your personal tax return. Your state may also require summaries of annual or quarterly payroll activity. Keeping organized from the start makes this easy.
8. Can I put my nanny on my business payroll?
Generally, no. Household employment is personal, not business-related, and mixing payroll streams creates unnecessary legal risk. Keep your nanny’s payroll separate and correctly classified.
9. Is a written nanny contract required?
While not legally required, a written agreement is essential. It outlines expectations, responsibilities, schedules, pay, PTO, overtime rules, and benefits. It protects both parties and prevents misunderstandings long-term.
10. What’s the easiest way to manage nanny payroll?
You have options:
- DIY if you’re comfortable with taxes and record-keeping
- Professional payroll service for a hands-off, fully compliant approach
- Hybrid model if you want support with only certain parts (like quarterly filings)
Hello Nanny! can guide you through choosing what fits your family and we can recommend trusted payroll partners.
11. Do I get tax breaks for paying my nanny legally?
Yes. When you pay your nanny legally, you may qualify for valuable tax savings through the Child and Dependent Care Tax Credit (CDCTC) and/or your employer’s Dependent Care FSA. Many families recoup a meaningful portion of their childcare costs through these benefits.
12. Where do I go if I have more questions about nanny payroll and paying my nanny legally?
You can reach out to a trusted household payroll provider (here’s our recommendation) or a nanny tax specialist for personalized guidance. They can walk you through payroll, taxes, and compliance so you feel confident staying on the right side of the law.
👉If you’re craving more time, space, or support, Hello Nanny! is here to help. Start your intake to explore the right fit for your family.
