Do You Need to Pay Your Nanny as a W-2 Employee?

The short answer is YES. Absolutely. No question. In fact, compensating your nanny legally, as a W-2 household employee, is a requirement of working with our agency.

Each year, there is a nanny tax “threshold.” In 2023, that was $2600, and in 2024, it will be $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.

Don’t worry, we’re not going to get too technical here (but when you are ready to get technical, check out this incredible nanny tax resource from GTM Payroll).

Instead, what we want to focus on here is the WHY.

So, aside from legality (which should be a big motivator!), why is it so important to pay your nanny on the books?

Paying your nanny under the table might seem simpler, less complex, one less thing to worry about when it comes to your already-complicated taxes. Perhaps you have some friends who’ve said they love the ease of just writing a check for their caregiver each week and not worrying about any other details.

We’ve heard it! It’s not uncommon! 

But we also wholeheartedly stand by the fact that the only correct way to compensate your nanny is by issuing them a W-2.

If you’re looking to hire a highly-qualified, long-term career nanny, legal payment is most likely going to be a requirement, and here’s why:

1. Nannies need verifiable income.

   • If your pay is not documented, there is no way to prove you have income. What if your nanny wants to rent an apartment or buy a home? What do they do if they need to apply for a car loan or student loan or credit card? These things all require proof of income, and if a nanny is being paid under the table, there’s no way to verify this income.

2. Nannies need an employment history.

   • Along with proof of income, having a legal employment history is often necessary when applying for a loan or credit of any kind, as well as their next job.

3. Nannies need a safety net.

   • The age of COVID made this crystal clear for nannies, as some could not qualify for unemployment benefits because they were paid off the books. As an employer, you are required to pay an unemployment insurance tax, and then if your nanny were to lose their job through no fault of their own, unemployment coverage could help them in the short-term as they look for a new position.

4. Nannies need social security and medicare benefits.

   • When nannies are W-2 employees, both the family and the nanny will be required to pay Social Security and Medicare taxes. Since many nannies are not offered formal retirement funds, it is important for nannies to be able to access these benefits upon retirement.

5. Nannies need health insurance.

   • The Affordable Care Act requires that we have health insurance. Many nannies buy a policy through the marketplace to attain their coverage, and if they are paid legally, they may have access to earned income tax credits that will allow for a tax break or refund at the end of the year. Additionally, if you, as the family, choose to offer a monthly health insurance stipend to your nanny, there will be employer tax benefits for you!

It is important to note here that a nanny is NOT an independent contractor. The family defines the nanny’s schedule and duties, provides instructions for how things should be done, and offers the necessary gear, supplies, and equipment to do the job well. Therefore, a nanny is a W-2 employee, and not an IC. When you misclassify your nanny as a contractor, the nanny also 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.

Apart from it being the ethical thing to do, compensating your nanny legally comes with a great deal of benefits. While some of these benefits may seem a bit more exciting for your nanny than for you, it’s important to remember that when you hire a nanny, or any kind of domestic employee, you become an employer. This is a big responsibility, and not one to be taken lightly. It’s easy to see our caregivers as extensions of ourselves and our family, and while this can definitely be true, it still is an employer-employee relationship. If you want longevity in this relationship, your nanny needs to feel valued and respected. Paying your nanny legally lays the foundation for a long and healthy partnership.

For more information on updated nanny pay rates in the Chicago area, head to our blog post Nannies Are A Luxury: Updated Pay Ranges & Expectations. If you would like any resources surrounding payroll and nanny compensation, we proudly partner with HomePay for assistance with calculating taxes for your household employee and payroll services.

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Nanny Harmony is a well-established, premier nanny placement agency, based in Chicago and offering services nationwide. 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.