Tax obligations for household employees

Article | April 15, 2025

Authored by Weinlander Fitzhugh

Hiring household help—whether it’s a nanny, home health aide, or housekeeper—can make life easier. But once you pay someone to work in your home under your direction, the IRS considers you an employer. That means you have tax responsibilities, often referred to as the “nanny tax.”

Despite the name, this isn’t just about nannies. It applies to a broad range of household employees, and overlooking these rules can lead to penalties or back taxes. Understanding your obligations helps you stay compliant and maintain a smooth working relationship with your household staff.

Household employees vs. independent contractors

The cornerstone of determining who is considered a household employee hinges on control—specifically, whether you, as the homeowner, dictate both the work to be done and how it must be done. If you guide the scope of work, schedule, and method of completion, that individual likely meets the definition of a household employee. Common examples of household employees include nannies, babysitters, home health aides, private caregivers, housekeepers, and cooks. 

However, if a worker sets their own hours, uses their own tools, and offers their services to multiple clients, they’re likely an independent contractor – and you’re not responsible for withholding or paying their taxes. 

Certain familial or age-based exemptions may apply. For instance, an underage babysitter who is still primarily a student may not be subject to Social Security and Medicare withholdings, and there are special rules if the worker is a spouse, child, or parent performing household services.

Key Household Employment Tax Requirements

FICA (Social Security and Medicare) Tax

When you employ a household worker and pay them above a certain threshold, you must withhold and pay FICA taxes. For tax year 2025, if the total cash wages reach $2,800, you must withhold and pay Social Security tax (6.2% from the employee’s wages and 6.2% from you) and Medicare tax (1.45% from the employee’s wages and 1.45% from you). 

Notably, the Social Security wage base has been set at $176,100 in 2025. Any wages beyond these levels are not subject to Social Security taxes, although Medicare taxes still apply to all wages. If a worker is under 18 and their primary occupation is something other than household employment, FICA taxes usually do not apply.

FUTA (Federal Unemployment) Tax

Federal Unemployment Tax (FUTA) is owed if you pay a total of $1,000 or more in wages to household employees in any calendar quarter of the current or previous year. The FUTA rate is 6% for the first $7,000 of wages per employee. Most employers can receive a reduction in the overall federal rate if they also pay an applicable state unemployment tax. These credits generally bring the effective FUTA rate down from 6%, but you need to properly file and pay your state unemployment taxes to qualify.

Income Tax Withholding

The law generally doesn’t require federal income tax withholding for household employees unless both you and the employee agree, in which case they complete a Form W-4 to determine how much to withhold. Even though it’s optional, withholding can simplify matters for the employee and reduce the risk of them owing a lump sum when they file their personal return. 

Setting Up Payroll and Reporting

If you’re paying a household employee, you’ll need an EIN to report payroll taxes. You can request an EIN from the IRS using Form SS-4. This number identifies you as an employer whenever you file employment tax forms and helps you keep your personal information separate from business tax matters. 

When you begin employing someone in your home, you also have reporting responsibilities. Your employee should complete Form I-9 to document their eligibility to work in the United States. You should also obtain a completed Form W-4 if you agree to withhold income tax for the employee. 

When you file your personal tax return, you’ll also need to file a Schedule H (Household Employment Taxes) reflecting the FICA, FUTA, and any withheld federal income taxes for your household staff.

Additionally, you must provide the employee with a Form W-2 at the end of the year, showing their wages and any withheld taxes. Submit the corresponding Form W-3 to the Social Security Administration to summarize the W-2 details. Keep in mind that if you run a sole proprietorship, you may have the option to combine your household employee taxes with those you file for your business on Forms 940 (FUTA) and 941 (quarterly payroll taxes). However, many employers find it cleaner to keep household payroll separate by using Schedule H.

Recordkeeping Requirements

The IRS generally recommends keeping household employment tax records for at least four years after the relevant tax return is filed or the tax is paid, whichever is later. You’ll want to note each employee’s name, address, Social Security number, wages paid, hours worked, taxes withheld (if any), payment dates, and copies of any quarterly or annual filing documents. Proper recordkeeping helps you validate all amounts reported on your returns and protects you in the event of an audit.

Is it worth hiring a household employee instead of using independent contractors?

At first glance, hiring a household employee might seem like more trouble than it’s worth. Between payroll taxes, paperwork, and compliance requirements, many people wonder: why not just hire independent contractors instead?

For some household tasks, like hiring a cleaning service or a landscaper, using independent contractors makes perfect sense. These professionals typically set their own schedules, provide their own tools, and serve multiple clients, meaning they’re truly self-employed. But for roles requiring consistent, long-term, or dedicated service—such as a full-time nanny, private caregiver, or live-in housekeeper—you’re almost certainly hiring an employee, not an independent contractor. And you can’t classify an employee as an independent contractor just to avoid taxes and paperwork. If you control their work, schedule, and methods, they’re an employee in the eyes of the IRS. Misclassifying them could lead to serious penalties.

Are there tax benefits to hiring a household employee?

While household employment taxes might feel like a burden, there are situations where having employees on payroll could be advantageous – especially for high-net-worth individuals. 

If you have a long-term household employee, you may be able to set up a Simplified Employee Pension (SEP) plan, sometimes called a “Nanny SEP.” This allows you to contribute to their retirement in a tax-advantaged way. While this doesn’t provide a direct tax deduction for you, it can help attract and retain high-quality staff. 

If you hire a home health aide or caregiver for yourself or a family member, some wages may qualify as deductible medical expenses if the care is primarily for medical reasons. This can provide meaningful tax savings for those who itemize deductions. 

If you hire a nanny or caregiver so that you and your spouse can work, part of their wages may qualify for the Child and Dependent Care Credit, which can offset taxes owed. However, the same wages cannot be used for both this credit and as a medical expense deduction. 

Avoid costly mistakes

To help ensure a seamless and accurate payroll process, consider establishing a written employment agreement that outlines wages, job duties, and any agreed-upon tax withholdings. Keep detailed records of hours worked, wages paid, and taxes withheld.

If the idea of handling these requirements each quarter seems daunting, consider hiring a payroll service or working closely with a professional tax advisor. Doing so will help you stay on schedule with your payments and filings, reducing the possibility of unpleasant year-end surprises.

If you have questions about your specific situation or need help setting up payroll, contact our office. A little planning now can save you headaches down the road.