How to Pay a Nanny | Avoid IRS Trouble Starting Today

To pay a nanny legally, treat them as a household employee, obtain an EIN, and withhold FICA taxes if you pay cash wages of $2,800 or more in 2025.

You hire a nanny you trust, then face a quiet question: pay cash under the table or set up a formal payroll system. Skipping the paperwork feels simpler, and many families do it — but that choice carries risks that don’t show up until tax season or an audit.

The IRS considers most nannies household employees, not independent contractors. This article walks through the legal steps — from getting an EIN to filing Schedule H — so you protect your family and your nanny at the same time.

What “Household Employee” Means for Your Family

The IRS uses a specific test. A nanny is a household employee if you control what work is done and how it’s done — for example, setting the schedule, providing the supplies, and directing daily tasks. This separates household help from independent contractors like repairmen or plumbers who manage their own work.

Household employees also include babysitters, housekeepers, maids, and gardeners who work in or around your private residence. If you set the terms of the job, the IRS sees you as the employer.

That designation matters because it triggers tax responsibilities — Social Security, Medicare, unemployment, and reporting rules that don’t apply when you hire a contractor.

Why The “Cash Under-the-Table” Temptation Backfires

Paying cash off the books may feel like a private arrangement, but it directly violates employment laws. When a family goes this route, both parties lose important protections. Here are the main risks:

• Penalties from the IRS: The agency can assess back taxes, interest, and fines for unpaid payroll taxes — plus late-filing penalties that add up fast.
• No Social Security or Medicare credits for your nanny: Legal wages earn credits that count toward retirement and disability benefits. Under-the-table pay leaves your nanny with zero record.
• Your nanny may not be covered by workers’ compensation: If your nanny is injured on the job, you could be personally liable for medical bills and lost wages without proper insurance.
• State unemployment claims: If the employment ends and your nanny files for unemployment, the state may investigate — and you could owe back taxes plus penalties.
• Harder to attract quality candidates: Many experienced nannies expect legal pay because they rely on documented income for loans, housing, and benefits.

Paying above board takes more upfront work, but it protects your family from legal exposure and gives your nanny earned benefits they can rely on.

Step-by-Step: How to Pay a Nanny Legally

The first move is confirming your nanny qualifies as a household employee. The IRS outlines this in their household employee definition — you’re the employer if you control the work details. Once that’s clear, here are the key thresholds that trigger specific tax duties:

These thresholds reset each calendar year. Even if you expect to fall below the FICA trigger, it’s often simpler to handle payroll from day one rather than scrambling midyear.

Setting Up Payroll: Payment Methods and Compliance

Once you know the tax rules, the practical setup involves a few key steps. Many families use a payroll service to automate withholdings and filings, but you can also do it yourself with the right forms.

1. Obtain an Employer Identification Number (EIN): Apply free through the IRS website. You’ll need this to file returns and issue W-2s.
2. Register with your state’s labor department: You may need a state tax ID and must pay state unemployment insurance (SUI) — thresholds vary; New York, for example, requires quarterly reporting once wages exceed $500 in a quarter.
3. Set up direct deposit or another consistent method: Direct deposit gives your nanny immediate access to funds and eliminates check handoffs. Most payroll services offer this option.
4. Provide pay stubs each pay period: State laws often require a statement showing gross pay, taxes withheld, and net pay. Even if not required, it builds trust.
5. Decide on income tax withholding: You’re not required to withhold federal income tax, but you may do so if your nanny requests it. Many nannies prefer having taxes taken out rather than paying quarterly estimated taxes.

Industry guidance suggests starting everything — EIN, state registration, and a written work agreement — before the first day of work so there’s no confusion later.

State Rules and Long-Term Compliance

Federal rules apply nationwide, but each state has its own unemployment insurance thresholds, tax rates, and reporting deadlines. For example, in New York, employers must start paying state unemployment tax once they pay a domestic worker over $500 in a calendar quarter — a lower threshold than the federal FUTA trigger.

Once you have your federal setup in place, Care’s guide to obtaining an EIN also walks through state registration steps. You’ll typically need to create a separate account with your state’s workforce agency.

Year-round compliance means filing Schedule H with your annual tax return, submitting quarterly state unemployment reports where required, and providing a W-2 each January. A household payroll service can handle these deadlines automatically for a monthly fee — many families find it worth the cost.

The Bottom Line

Paying a nanny legally involves a few upfront steps — getting an EIN, understanding FICA and FUTA thresholds, filing new hire reports, and running payroll correctly. The process takes more effort than handing over cash, but it shields you from IRS penalties and gives your nanny access to Social Security, Medicare, and unemployment benefits.

For tax-year-specific guidance or questions about your state’s rules, a CPA or enrolled agent who handles household employment taxes can review your situation and help you set up a system that fits your family.