For the 2025 tax year, the IRS established the household employee Social Security and Medicare (FICA) tax threshold at $2,800. If you paid a nanny or any other household worker more than this amount during the 2025 calendar year, you were legally required to withhold and pay employment taxes.
As we move through 2026, many household employers are now finalizing their 2025 tax filings or reconciling their records for the previous year. Understanding the "nanny tax" is not merely a matter of calculating a single number; it involves a complex interplay of federal thresholds, unemployment insurance requirements, and specific classification rules that distinguish employees from independent contractors. Failing to adhere to these thresholds can lead to significant back taxes, interest, and penalties from both the IRS and state tax authorities.
Understanding the 2025 Threshold Mechanics
The nanny tax is a collective term for the federal and state tax obligations that arise when an individual hires someone to work in or around their home. While the primary threshold for 2025 was $2,800 for Social Security and Medicare, there are secondary thresholds for federal and state unemployment taxes that employers must also navigate.
The Social Security and Medicare (FICA) Threshold
The $2,800 limit for 2025 is an "all-or-nothing" threshold. If a household employee earned $2,799, no FICA taxes were owed. However, once the earnings reached $2,800, every dollar earned—including the first $2,799—became subject to FICA taxes.
FICA consists of two parts:
- Social Security: 6.2% of wages paid by the employer and 6.2% withheld from the employee (12.4% total).
- Medicare: 1.45% of wages paid by the employer and 1.45% withheld from the employee (2.9% total).
Combined, the FICA tax rate is 15.3% of the nanny's gross wages. As an employer, you are responsible for remitting the entire 15.3% to the IRS, even if you failed to withhold the employee’s 7.65% share from their paycheck.
The Federal Unemployment Tax (FUTA) Threshold
The FUTA threshold is separate from the FICA threshold. If you paid any household employee (or combination of employees) a total of $1,000 or more in any calendar quarter of 2025, you are liable for federal unemployment tax.
FUTA is an employer-only tax. The rate is 6.0% on the first $7,000 of the employee's annual wages. However, most employers receive a credit of up to 5.4% if they pay their state unemployment taxes on time, effectively reducing the FUTA rate to 0.6%. This equates to a maximum of $42 per employee per year, provided the state tax obligations are met.
Worker Classification: Employee vs. Independent Contractor
A common mistake made by household employers is attempting to treat a nanny as an independent contractor (issuing a Form 1099 instead of a Form W-2). According to IRS Publication 926, a worker is your employee if you can control not only what work is done but also how it is done.
The Control Test
If you provide the tools (strollers, car seats, house supplies), set the working hours, and provide specific instructions on how the child should be cared for or how the house should be cleaned, the worker is an employee. Nannies are almost universally classified as employees because they work in the employer's home and follow the employer's direction.
Consequences of Misclassification
Misclassifying a nanny as an independent contractor is considered tax evasion. If audited, the employer may be held liable for:
- The unpaid employer share of FICA taxes.
- The unpaid employee share of FICA taxes (if not withheld).
- Unpaid federal and state unemployment taxes.
- Interest and failure-to-file penalties.
- Legal fees and potential fines for failing to provide workers' compensation insurance.
Household Employer Obligations and Paperwork
Once the $2,800 threshold is met, the administrative requirements for the employer increase significantly. These tasks are typically handled annually on the employer's individual tax return but require diligent record-keeping throughout the year.
Obtaining an Employer Identification Number (EIN)
You cannot use your Social Security Number to report nanny taxes. You must apply for a federal EIN from the IRS. This unique nine-digit number identifies your "household business" for tax purposes. If you did not obtain one during the 2025 tax year, you must do so before filing your 2025 return in 2026.
Schedule H (Form 1040)
The primary mechanism for reporting nanny taxes is Schedule H, which is attached to your personal Form 1040. On this form, you calculate the total FICA and FUTA taxes owed. The total amount is then added to your personal income tax liability. Many families increase their own workplace withholdings or pay estimated taxes throughout the year to cover this additional cost and avoid an underpayment penalty.
Form W-2 and W-3
By January 31, 2026, you were required to provide your nanny with a Form W-2, showing their total earnings and taxes withheld for 2025. A copy of the W-2, along with Form W-3 (the transmittal form), must be filed with the Social Security Administration (SSA).
| Tax Type | 2025 Threshold | Rate (Employer) | Rate (Employee) | Total |
|---|---|---|---|---|
| Social Security | $2,800/year | 6.2% | 6.2% | 12.4% |
| Medicare | $2,800/year | 1.45% | 1.45% | 2.9% |
| FUTA (Federal Unemployment) | $1,000/quarter | 0.6%* | N/A | 0.6% |
| SUI (State Unemployment) | Varies by State | Varies | N/A | Varies |
*Effective rate after the standard 5.4% credit for paying state unemployment taxes.
State-Level Tax and Insurance Requirements
While the federal threshold is consistent across the United States, state requirements vary wildly and often have lower thresholds than the IRS.
State Unemployment Insurance (SUI)
Most states require household employers to pay into the state unemployment fund once a worker reaches a certain wage limit, often as low as $500 or $1,000 in a quarter. These rates are assigned based on the employer's history; new employers usually start at a "new employer rate" that ranges from 1% to 3%.
Workers' Compensation Insurance
In many states (such as California, New York, and Maryland), household employers are legally required to carry workers' compensation insurance if their employee works a minimum number of hours or earns a specific amount. This insurance provides medical coverage and wage replacement if the nanny is injured on the job. Failure to carry this insurance can lead to massive lawsuits and state-mandated fines that often exceed the cost of the taxes themselves.
Paid Family and Medical Leave (PFML)
An increasing number of states have implemented mandatory PFML programs. In these states, employers may be required to withhold a small percentage of the employee's pay or contribute an employer portion to a state fund that provides benefits for family or medical leave.
Tax Credits for Household Employers
While the "nanny tax" is an added expense, the federal government provides tax breaks that can offset a significant portion of these costs for families who hire child care to allow them to work or look for work.
Child and Dependent Care Tax Credit (CDCTC)
For the 2025 tax year, the Child and Dependent Care Tax Credit allowed families to claim a percentage of their work-related expenses for the care of a qualifying child under age 13. While the maximum amount of expenses that can be considered is generally $3,000 for one child or $6,000 for two or more, the credit itself is a percentage of those expenses.
Dependent Care Flexible Spending Account (FSA)
If your employer offers a Dependent Care FSA, you can set aside up to $5,000 of your pre-tax salary to pay for nanny services. Because this money is taken out of your paycheck before federal, state, and FICA taxes are applied, it can save the average family approximately $2,000 in taxes annually. Note that you cannot use both the FSA and the CDCTC for the same dollar of expense; however, if you spend more than $5,000 on care, you may be able to apply the remaining expenses toward the CDCTC.
Common Mistakes and How to Avoid Them
Even well-intentioned employers often stumble when navigating the 2025 nanny tax requirements. Recognizing these pitfalls early in 2026 can help you correct errors before they become permanent on a filed return.
- Paying "Under the Table": While it may seem easier to pay cash, it leaves the employer vulnerable to disability claims, unemployment claims (which trigger audits), and future legal disputes.
- Neglecting the $2,800 Threshold: Some employers believe that if they pay a nanny $50 a week, they are exempt. However, $50 over 52 weeks is $2,600—very close to the limit. If that nanny works just four extra days of babysitting, the employer crosses the $2,800 threshold and the entire $2,800+ becomes taxable.
- Failing to Verify Work Authorization: As a household employer, you are required to complete Form I-9 to verify that your nanny is legally allowed to work in the United States. You do not submit this form to the government, but you must keep it on file for three years after the date of hire or one year after the date employment ends.
- Miscalculating Gross vs. Net Pay: Taxes should be calculated based on "gross wages" (the amount before any deductions). If you tell a nanny you will pay them "$800 a week take-home," you are actually paying a higher gross wage and assuming the employee's tax burden yourself. This is known as "grossing up" and results in higher tax liability for the employer.
Frequently Asked Questions
What if I hired multiple nannies in 2025?
The $2,800 FICA threshold applies to each individual employee. If you hired two nannies and paid each $2,000, you do not owe Social Security or Medicare taxes because neither individual reached the threshold. However, the FUTA threshold ($1,000 per quarter) applies to the total of all household employees combined. Therefore, you would still likely owe unemployment taxes.
Are there exceptions for hiring family members?
Yes. The IRS generally excludes wages paid to a spouse, a child under age 21, or a parent from the $2,800 threshold. However, there are exceptions regarding parents if they provide care for a child who is under 18 or has a physical/mental condition, and the parent is a widow(er) or divorced. Always consult IRS Publication 926 for specific family-member exemptions.
Do I have to withhold income tax for my nanny?
No. Unlike FICA taxes, federal income tax withholding is not mandatory for household employees. However, many nannies prefer to have it withheld so they are not hit with a large tax bill at the end of the year. If both you and the nanny agree to withhold income tax, the nanny must provide you with a completed Form W-4.
What happens if I missed the filing deadline for 2025?
If you realize in mid-2026 that you failed to report 2025 nanny taxes, you should file an amended return (Form 1040-X) and include Schedule H. While you may owe interest on the late payment, voluntarily correcting the error is usually looked upon more favorably than waiting for an IRS audit.
Does the threshold change every year?
Yes, the IRS typically adjusts the household employee threshold annually based on inflation. For reference, the threshold was $2,700 in 2024 and rose to $2,800 in 2025. For the current 2026 tax year, the threshold has increased again to $2,900.
Final Recommendations for 2026
If you paid a household worker more than $2,800 in 2025, your first step should be to ensure you have an EIN and that all wages are documented. If you are currently filing your 2025 taxes, ensure Schedule H is completed accurately and attached to your Form 1040. For those continuing to employ domestic help in 2026, consider using a specialized nanny payroll service. These services automate the withholding process, handle quarterly filings, and ensure you remain compliant with both federal and state laws, significantly reducing the administrative burden on the family.
