Nanny Taxes: Paying Your Nanny Legally & Budgeting for Additional Costs
When you begin to approach a nanny search, there is soooo much to think about: ideal schedule, necessary duties, broader levels of support that may be helpful for your family, budget, pay rates, legal requirements, the ins and outs of your local nanny market and….PHEW, anyone else out of breath?! It can feel so overwhelming that it almost stops you in your tracks.
That’s a big part of why we’re here as an agency! We always remind our families that when they hire a nanny, they become a household employer. It seems simple enough, but it’s a responsibility that can’t be taken lightly. We also understand that it’s not necessarily second nature to know immediately how to be a good household employer.
In order to set everyone up for success in nanny-family partnerships, it’s pivotal for us to educate families both on legal requirements and industry standards and to equip them with the knowledge they need to provide an ethical setup and sustainable working relationship with their caregiver.
In order to do so, there are certain key factors to keep in mind and additional costs to budget for:
Nannies are W-2 employees.
In accordance with legal requirements, nannies are classified as W-2 employees, not 1099 independent contractors. This distinction ensures proper tax withholdings, benefit eligibility, and legal protection for both the employer and the employee. Hiring a nanny means adhering to the W-2 guidelines, ensuring compliance with regulatory standards, and establishing a transparent employment structure for all parties involved.
The nanny family defines the nanny’s schedule and duties, provides instructions for how things should be done, has control over the working conditions, and offers the necessary gear, supplies, and equipment to do the job well. This, combined with the permanence/long-term nature of the role, make it very clear that a nanny is a W-2 employee, and not an IC.
Because nannies are W-2 employees, family employers are required to pay their share of taxes.
When you misclassify your nanny as a contractor, the nanny becomes responsible for both the employee and employer FICA taxes, and therefore loses a great deal of income. You, as the employer, are required to pay your share of these taxes.
Each year, there is a nanny tax “threshold.” In 2024, that threshold is $2700. Here’s what this means: if you pay your caregiver at least $2700 in 2024, you are—by IRS definition—a household employer, and both you and your caregiver will need to pay taxes accordingly.
Nanny taxes are an essential aspect of hiring a household employee. Families who employ a nanny are responsible for paying employment taxes, including Social Security, Medicare, and federal unemployment taxes. We encourage families to prepare to budget an additional 10% for these employer taxes (on top of their nanny’s gross wages). Nannies must also report their income and pay their share of taxes, but failure to comply with employer tax obligations causes all of the tax burden to fall upon your nanny.
Nannies are non-exempt hourly employees (And need Overtime Pay).
In the state of Illinois, nannies are classified as non-exempt hourly employees under the Fair Labor Standards Act. This designation mandates that live-out nannies should receive overtime compensation for any hours worked beyond 40 hours in a workweek and that this overtime pay should be at a rate of time-and-a-half. It is crucial for families engaging nannies to comprehend and acknowledge this provision to guarantee equitable payment to their nannies in compliance with labor regulations. By embracing and upholding these standards, both nannies and employers can foster a relationship based on openness and mutual respect.
Families should have Workers’ compensation coverage for their nanny.
Families hiring a nanny are legally required to have workers' compensation insurance. Workers compensation coverage is essential for nannies and families to ensure financial protection in case of job-related injuries or illnesses. This insurance provides coverage for medical expenses, lost wages, and other costs resulting from work-related accidents. Workers compensation usually ranges from $60-80+/month.
Families may provide a monthly health insurance stipend for their nanny.
While nanny healthcare stipends are not required, we have been excited to see that more families have begun to offer this benefit as part of their compensation packages, especially for full-time caregivers. This stipend may range from $50-500+/month, and your nanny can use this allocated amount toward a marketplace plan that works best for their needs. When you contribute to your nanny’s health insurance premium, this amount is considered to be nontaxable compensation, both for you and for your nanny, which makes it particularly advantageous for both parties! For more details on this, check out this helpful article from HomeWork Solutions: Great Options for Nanny Health Insurance Benefits.
Families may enlist the support of an in-home payroll service.
Working with an in-home payroll service like HomePay is incredibly helpful because they take care of all onboarding, EIN setup, tax withholdings and calculations, electronic paystubs, and issuing important documents like the employee's W-2 and the employer's Schedule H, so you can have peace of mind that everything is being handled correctly. Payroll services typically range from about $60-80+/month.
For more details relating to taxes, insurance, and compliance, check out this amazing Nanny Tax Resource from GTM Payroll. We recognize that all of this can feel—well—unbelievably daunting at first.
We also recognize that caregivers want to stay where they are valued, respected, and appropriately compensated, so going the extra mile to pay your nanny legally is a long-term investment for you and for your family.
On top of this, aside from legality (which should be a big motivator!), we have a separate blog post ALLLL about why legal, on-the-books payment is so important for your nanny: Do You Need to Pay Your Nanny as a W-2 Employee? In this piece, we share about the importance of allowing your nanny to have verifiable income, legal employment history, Social Security and Medicare benefits, and a safety net in the case of unemployment, all of which are only possible if your nanny is compensated legally.
All in all, as an agency built upon transparency, advocacy, and strong ethics, we recognize how crucial it is to educate our families on these key components of employee compensation so that they are able to enjoy a healthy, long-lasting employment partnership.
Nanny Harmony is a well-established, premier nanny placement agency, based in Chicago and also offering services in New York. We take immense pride in our extensive community network and in our proven ability to find extraordinary matches between families and passionate, experienced nannies, household managers, and Newborn Care Specialists. To begin the process, fill out a family application here.
