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What you need to know about the ‘Nanny Tax’

Hiring a nanny can be stressful, after all—you’re inviting someone to care for your precious baby.


The stakes are high, and you want to get it right.

The good news is there are (literally) millions of other mamas in your boat, and lots of experts available to help you make the right decision.

(And we promise, it will be okay, mama!)

One of the many things to consider when choosing the right childcare option for your family is how it fits into the budget.

If you’re leaning toward or have decided that a nanny is a best, it’s important to make sure that you’re meeting your legal obligations.

Kerri Swope, senior director of Care.com’s HomePay, answered our questions about the “Nanny Tax” and the things we need to make sure are taken care of when hiring a nanny.

What is the “nanny tax?”

When a family employs a nanny (or any other household employee) and pays them more than $2,000 within the calendar year (effective 2016), they are responsible for withholding and paying taxes.

The “nanny tax” is the common phrase that pertains to the taxes a family needs to withhold from their employee as well as the taxes the family is required to pay as the employer. To get specific, this typically includes Social Security and Medicare (collectively known as FICA) and federal and state income taxes that are withheld from the employee each pay period.

As the employer, the family will also pay a matching portion of FICA, as well as federal and state unemployment insurance taxes.It’s important to remember that federal and state unemployment insurance taxes generally come into play when a family pays their employee $1,000 or more in a calendar quarter.

Usually a family will cross both the FICA and unemployment insurance tax thresholds, but sometimes that’s not the case. Regardless of your situation, it’s important to note that this can vary state by state, so families need to do their research to see what pertains to their needs.

Why do I need to pay the “nanny tax”?

The short answer is, because it’s the law. The IRS sets guidelines for families with household employees in Publication 926. It goes through all the federal requirements for withholding and paying taxes. If a family chooses not to follow these requirements, they can face tax evasion charges, be forced to pay back taxes, penalties and interest, and in some cases, lose their professional license.

Are there any exceptions?

Yes. In most cases, if the person you hire is your spouse, your child (if under 21), your parent, or someone under the age of 18 (if the job isn’t their primary occupation, i.e. they are a student), you are not responsible for going through the nanny tax process. Additionally, if you do not meet the FICA or unemployment insurance tax thresholds, you won’t have to deal with any nanny taxes. The FICA threshold in particular is very easy to hit and, when broken down, equates to roughly $39 a week or $170 a month. A lot of families underestimate this and can create more work for themselves if they don’t calculate this ahead of time.

What happens if I get caught not paying?

As of April 2006, the IRS started to crack down on employers who pay their employees under the table. Should you meet the $2,000 threshold and decide not to pay the appropriate taxes, you put yourself and your family at financial and legal risk. This can include tax evasion charges, back taxes, and penalties and interest. For those that have a professional license, such as a CPA or attorney, they’re also in jeopardy of losing that license. Now more than ever, it’s important to be cautious.

Doesn’t this make having a nanny more expensive?

When families hire a household employee and realize compliance involves taxes and tax filings, they immediately assume it will be expensive and time-consuming. The good news is it’s neither! Many families have access to tax breaks that can offset most – if not all – of the employer taxes. And services like HomePay were built to take all the employer-related paperwork off a family’s plate, not to mention the fees associated are tax deductible as professional service fees. There is even a nanny tax calculator that families and caregivers and leverage to help estimate these costs!

What tax breaks are available to help cover childcare costs?

When families pay their caregiver legally, they earn the ability to capitalize on one or more tax breaks that can offset most – if not all – of the employer tax cost.There are two main options that families can leverage, which include a Dependent Care Account and the Child Care Tax Credit. First, the Dependent Care Account, also known as a Flexible Spending Account is one that many companies offer their employees. Essentially, employees can contribute up to $5,000 of their pre-tax earnings to this account to help pay for childcare expenses. This means there is no federal income tax, state income tax or FICA taxes on that income, saving a family about $2,000 a year. Also available is the Child Care Tax Credit. If a family doesn’t have access to a Dependent Care Account, they can claim the Tax Credit for Child or Dependent Care (IRS Form 2441) on their personal federal income tax return at year-end. This tax credit saves $600 for families with one child or $1,200 for families with two or more kids.

What are the benefits for my nanny?

Whether it’s a nanny, housekeeper or even your pet sitter, household workers are important to our lives and deserve professional benefits and security for the jobs they do. When paying compliantly, a family provides such benefits to their employee, which can include a tangible employment history, which is important for creditors; unemployment benefits; health insurance subsidies (dependent upon the employee’s income level among other factors); and Social Security and Medicare benefits upon retirement. These benefits are essential to the employee in both the short- and long-term.

If I’m in a nanny share, how do the taxes work?

When a family is in a nanny share, each is viewed as a separate household employer in the eyes of the law, even if the care is provided in only one of the homes. Essentially, the nanny takes direction from both families and both families share in the expense of her pay.

Each family is required to establish themselves as a household employer with the IRS and the state, each paying the nanny separately. This includes withholding and remitting payroll taxes appropriately to the IRS and state agencies on their portion of her salary.

While it may seem easier to have one family handle tax withholdings and remittance on the full salary, this creates risk for the family who is not registered as a household employer with the IRS and the state tax agencies. In addition, there is risk for the family who pays the nanny in full and then has to collect from the second family.”

To clarify: If two families hire the same nanny to care for their children, but the care is provided separately, this is not a nanny share arrangement. This is different because the children are not cared for as a group—the nanny works for one family at a time and the children are cared for in their home. In this case, the nanny has two part-time jobs.

Who says you have to wait for birthdays or holidays to give your bestie a great gift? A sweet surprise that tells her you've been thinking of her might be the pick-me-up she needs in these more-than-trying times. We've rounded up some of our favorite go-to gifts that are certain to be a bright spot in her week. But be warned, you may want to snag a few for yourself. (You deserve it, mama.)

Here are some our favorite "just because" gifts to give our hardworking mama friends.

New Mother face + body care duo

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This correcting oil and stretch mark minimizer is perfect for the pregnant mama looking to keep her pregnancy glow. The correcting oil brightens the skin while reducing dark spots, and the stretch mark minimizer works to smooth her ever-growing belly.

$70

Allover roller

esker allover roller

This jade roller goes beyond your typical face roller and can be used anywhere on the body. It works to increase stimulation and reduce puffiness and is perfect for applying any oils to the face or body. Plus, it feels like a mini spa treatment.

$65

Kombucha making kit

farmsteady kombucha making kit

What could be a more perfect gift for the health-obsessed friend? This kombucha making kit comes with everything you need to brew your own homemade green tea kombucha. They'll think this is the tastiest gift ever.

$45

Laetitia lipstick

cupid & psyche laetitia

This red lipstick is perfect for your makeup enthusiast bestie who is looking to spruce up her life in quarantine. Crafted in the United States, these bee and vegan-friendly and cruelty-free lipsticks are created to flatter all complexions. Cupid and Psyche Beauty makes finding the perfect red lip way too easy!

$23

Jigsaw puzzle

inner piecec jigsaw puzzle

Mamas need to destress now more than ever during quarantine. This adorable jigsaw puzzle is perfect for the mama who needs a brain break! The 500-piece puzzle designed by artist Ray Oranges features an abstract gradient design that fits a standard frame when completed. Bonus: It's printed on recycled paper and the company donates $1 from every puzzle sold to youth mindfulness programs.

$30

Matilda's Bloombox

matilda's bloombox

If we have to be stuck inside, we might as well have some gorgeous florals to brighten up the space. Matilda's Bloombox locally sources blooms, delivers them to her door and provides simple tips on how to arrange it into a beautiful bouquet.

$39

'I Am Enough' bracelet

I Am Enough bracelet

Let this dainty bracelet serve as a constant reminder to your bestie that she is enough. She'll wear this on her wrist and read this daily oath to herself, "I Am Enough."

$35

Glow assorted teas

vahdam low assorted teas

This tea gift box set covers the entire spectrum of flavors from sweet to spicy. Individually packaged in beautiful tins, your gal pal will feel like a queen sipping her morning tea. Originally $40, this set is currently on sale for just $24. We'll take two, please.

$24

Find your voice journal

find your voice journal

Journaling is a great way to ease anxiety and will slow your bestie's racing mind before bed. This gift is perfect for first time journalists and includes prompts, daily quotes and coloring pages to help her unlock her potential and find her voice.

$22

Premium frother

shore magic premium frother

This gift is fitting for your latte-sipping bestie who can't go a day without her coffee. All she has to do is add two scoops of collagen to her favorite drink, and she'll have a perfectly foamy drink ready in seconds. Skipping the drive-thru line has never been so easy!

$25

Bath soak infusion kit

maude bath soak infusion kit

Say hello to hydration! She'll be feeling smooth and relaxed as ever after a long bath soaking in these salts. This vegan + cruelty-free set incorporates dead sea salt and dehydrated coconut milk powder for an ultra hydrating experience.

$32

Tiny Tags 'mama' necklace

Tiny Tags 'mama' necklace

It's a hard-earned title she answers to a hundred times per day. Whether she's new to the club or a seasoned professional, this delicate script 'mama' necklace is guaranteed to be a perfect fit.

$105

Superfood honey

Beekeeper's Naturals B.Powered honey

With a lack of sleep and jam-packed days, getting through the afternoon can be a real challenge. Send her a powerful pick-me-up in the form of a therapeutic blend of royal jelly, bee pollen, propolis and raw honey. It makes the ideal companion for tea, smoothies, yogurt or even on its on.

$17

Calming midnight mask with melatonin

Who doesn't deserve a reminder to pamper themself every once in awhile? Even better, this mask does all its work at night while you're sleeping with no extra effort needed. It's an amazing plant-powered antioxidant-packed mask that has melatonin, wild dandelion leaf and hyaluronic acid to rehydrate, repair and reset facial skin. It's so good, you might want to gift it to yourself. We won't tell, mama.

$68

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