Nanny Taxes and Household Employees, What the Law Requires

You found a wonderful nanny, agreed on a weekly rate, and started paying her every Friday. A few months in, a friend mentions nanny taxes, and you realize you have no idea whether you are an employer, what you owe, or whether you have already missed a deadline. This is one of the most common situations we see among physician and dual-career households in Atlanta, and the rules are more manageable than the anxiety suggests.

The short version is that a household worker you control and pay directly is your employee. That triggers Social Security and Medicare taxes, unemployment taxes, a year-end W-2, and a schedule attached to your personal return. The longer version covers who counts as a household employee, what the thresholds are, how Georgia's rules layer on top, how to run payroll without losing your weekends, and the tax benefits that make compliance cheaper than most families expect.

This is educational content, not tax advice for your specific situation. Attend does not prepare tax returns, and we coordinate with your CPA on the details.

Who Counts as a Household Employee

The IRS test is about control. If you decide what work is done and how it is done, the worker is your employee, regardless of whether the work is full-time or part-time, whether you found them through an agency, or what your written agreement calls them. That covers nannies, regular babysitters, housekeepers, cooks, private nurses, home health aides you hire directly for an aging parent living with you, gardeners, and drivers. The IRS lays this out in Publication 926, Household Employer's Tax Guide.

The worker is not your employee if they run an independent business and control their own work, such as a landscaping company that serves many customers, or if they are placed and paid by an agency that handles their payroll. Signing a contract that labels a nanny an independent contractor does not make her one, and issuing a 1099 to a nanny is a common error that invites penalties.

A few exemptions matter. Wages paid to your spouse, to your child under 21, to your parent in most cases, and to a worker under 18 whose principal occupation is being a student, such as a high school babysitter, are exempt from Social Security and Medicare taxes.

What Nanny Taxes Actually Include

Household employment taxes have three federal pieces and a set of state obligations. The federal ones are the core.

Social Security and Medicare (FICA)

Once you pay a household employee cash wages at or above the annual threshold, which the IRS adjusts periodically and publishes in Publication 926, you owe FICA taxes on all wages paid that year, not just the amount above the threshold. The combined rate is 15.3 percent: 6.2 percent Social Security and 1.45 percent Medicare from each of you and the employee. You may withhold the employee's half from each paycheck or pay it yourself as additional compensation. Many families choose to withhold, because it keeps the nanny's gross pay figure clean for future employers and loan applications.

Federal unemployment tax (FUTA)

If you pay total cash wages of $1,000 or more to household employees in any calendar quarter, you owe FUTA on the first $7,000 of each employee's annual wages. The statutory rate is 6 percent, but employers who pay state unemployment tax on time receive a credit that brings the effective rate to 0.6 percent, or a maximum of $42 per employee per year.

Federal income tax withholding

You are not required to withhold federal income tax from a household employee's wages unless the employee requests it and you agree. Most families do agree, because it prevents the nanny from facing a large bill in April. The employee completes a Form W-4, and you withhold according to the tables. Georgia state income tax withholding follows similar logic.

Georgia's Rules for Household Employers

Georgia adds two obligations on top of the federal ones. First, once you have paid $1,000 or more in a quarter, you must register with the Georgia Department of Labor as a domestic employer and pay state unemployment insurance tax on wages, filed quarterly. Paying it on time is what earns the federal FUTA credit. Second, Georgia requires all employers to report new hires to the state new hire registry within a short window after the start date.

Georgia does not require workers' compensation coverage for employers with fewer than three employees, so a family with one nanny is generally exempt. That does not eliminate the risk of an injury claim. Check whether your homeowners policy covers domestic workers, and consider a voluntary workers' compensation policy, particularly if the nanny drives your children. Our guide to umbrella liability insurance covers the broader household liability picture.

For state income tax withholding and registration details, the Georgia Department of Revenue is the official source.

Wage and Hour Rules You Cannot Skip

Nanny taxes get the attention, but wage and hour law creates the larger liability. Domestic workers are covered by the federal Fair Labor Standards Act. A live-out nanny must be paid at least the federal minimum wage and overtime at one and a half times the regular rate for hours over 40 in a workweek. A live-in nanny must receive at least minimum wage for all hours worked but is exempt from federal overtime. The Department of Labor explains the rules for domestic service workers.

A common mistake is agreeing to a flat weekly salary for a 50-hour week without stating the hourly rate and overtime. If the relationship ends badly, the nanny can claim unpaid overtime for up to two or three years, and the back-pay math is not in the family's favor. Put the hourly rate, overtime rate, and guaranteed hours in a written agreement, and keep time records.

Running Household Payroll Step by Step

The process looks intimidating on paper, but it is a one-time setup followed by a predictable routine.

• Get an employer identification number (EIN) from the IRS. It is free and takes minutes online. Do not use your Social Security number on the nanny's forms.
• Verify work eligibility by completing Form I-9 with the employee within three business days of the start date and keep it on file. You do not send it anywhere.
• Collect a W-4 and a Georgia G-4 if you will withhold income tax.
• Register with the Georgia Department of Labor for unemployment insurance and file the new hire report.
• Pay on a regular schedule and provide a pay stub showing gross wages, withholdings, and net pay. Direct deposit is fine.
• Pay your federal taxes during the year. Household employment taxes are reported on Schedule H with your Form 1040, but the IRS expects payment during the year. Either increase withholding on your own W-2 or make quarterly estimated payments. Our quarterly estimated taxes guide explains the mechanics.
• File quarterly with the Georgia Department of Labor for state unemployment.
• At year end, give the employee Form W-2 by January 31, file Form W-3 and the W-2 copy with the Social Security Administration, and attach Schedule H to your return.

Should you use a payroll service?

For most families, yes. Household payroll services charge a monthly fee that is usually less than an hour of your time and handle registrations, withholding, deposits, quarterly filings, and year-end forms. A CPA who already handles your return can also manage it. The cost is trivial next to the penalty exposure and the value of your evenings.

Tax Breaks That Offset the Cost of a Nanny

Compliance has a return on investment. Two federal benefits are available only to families who pay legally, and for a high-income household they cover a substantial share of the employer taxes.

Dependent care flexible spending account

If an employer offers a dependent care FSA, you can set aside pre-tax dollars for childcare for children under 13, including nanny wages. The 2025 federal tax law raised the annual contribution cap beginning in 2026; the current limit is published by the IRS and in your employer's plan documents. For a family in a high bracket, running the maximum through the FSA avoids federal income tax, Social Security and Medicare tax, and Georgia income tax on that amount, which is often worth several thousand dollars a year. Elections are made during open enrollment, so plan ahead.

Child and dependent care credit

Expenses not reimbursed through an FSA can qualify for the child and dependent care credit, claimed on Form 2441. The credit applies to a capped amount of expenses for one or two or more qualifying children, and the percentage was increased for tax years beginning in 2026, with the rate stepping down as income rises. Higher earners still receive a credit at the lowest rate. Check the current figures in the Form 2441 instructions. You cannot double-count expenses run through the FSA, and the credit requires the caregiver's name, address, and taxpayer identification number, which is one more reason the off-the-books arrangement does not work.

Why Paying Off the Books Is a Bad Trade

Families rationalize cash payments as simpler or as a favor to the nanny. Neither holds up. For the family, the exposure includes back taxes, interest, and penalties for every year of non-compliance, plus the loss of the FSA and credit benefits. Discovery usually happens the ordinary way: the nanny files for unemployment after the job ends, applies for Social Security disability, or reports the income on her own return, and the agency follows the trail back to you.

For the nanny, cash wages mean no Social Security or Medicare credits toward retirement and disability benefits, no unemployment insurance if the family relocates or the children start school, and no verifiable income for renting an apartment or qualifying for a mortgage. A nanny who understands this will often prefer legal pay, even at a slightly lower net wage, and families can negotiate the gross rate with that in mind.

Nanny taxes are a compliance chore, not a financial catastrophe. The employer share of payroll taxes adds roughly 10 percent to the wage, the tax breaks claw back a good portion of that, and a payroll service turns the rest into a monthly line item. What matters is starting on the right footing: a written agreement with an hourly rate and overtime, an EIN, a payroll process, and a plan to cover Schedule H taxes during the year. If you would like help fitting childcare costs and the related tax planning into your overall picture, our tax planning work coordinates with your CPA, and the families page describes how we approach these decisions.

Tony Colunga · Founder, Attend Wealth

Tony leads Attend Wealth, a fee-based wealth management firm in Atlanta serving professionals, families, physicians, and business owners. Advisory services are held to a fiduciary standard. More about Attend