The Nanny Tax: What Hiring Household Help Actually Requires

Hire a nanny, a regular housekeeper, or an in-home caregiver and pay them above the annual threshold (a couple thousand dollars, adjusted yearly), and congratulations: you’re a household employer, with a compliance system named after the nanny but covering far more workers.

Who counts

The test is the same control standard businesses face: if you set the schedule and direct the work in your home, the worker is your employee — not an independent contractor, no matter what anyone prefers. Nannies and au pairs, regular housekeepers, private home health aides, house managers. (Agencies that employ the worker themselves, and true independent businesses like a cleaning company with its own crew and clients, fall outside it.)

What you owe

FICA: you and the worker each owe half of Social Security and Medicare (~7.65% each); many families simply pay both halves as a benefit.

Federal and state unemployment insurance above modest wage thresholds.

New Jersey adds its own layer: state unemployment, disability, and family leave contributions, with registration as a household employer.

Income tax withholding is optional (by agreement), but a W-2 by January 31 is not.

The federal pieces reconcile annually on Schedule H with your own 1040 — no separate federal filing regime, though quarterly state filings apply. All-in, employer costs typically add ~10% to the wage.

Why families pay off the books — and why it backfires

The cash arrangement feels simpler until it doesn’t:

You forfeit the childcare tax benefits. The dependent care FSA (now $7,500) and the child care credit both require the provider’s tax ID on your return. On a $40,000 nanny wage, the forfeited benefits alone can approach the cost of compliance.

One unemployment claim unravels everything. A nanny laid off between families who files for benefits triggers the state to ask who was paying her — and NJ works backward from there with penalties.

The worker loses too: no Social Security credits, no unemployment safety net, no verifiable income for apartments or loans. Increasingly, experienced nannies require legal pay — it’s become a market-quality signal.

Household employment questions have sunk cabinet nominations; they will not improve a professional license review either.

The painless setup

Step 1 — Register for federal and NJ employer accounts (an EIN takes minutes online).

Step 2 — Use a household payroll service — several handle everything for $50–75/month, including the W-2 and state filings. This is the single best money in the entire arrangement.

Step 3 — Put wages, schedule, and the FICA arrangement in a simple work agreement.

Step 4 — Route the pay through the dependent care FSA where eligible, and claim the credit on the excess.

Step 5 — Check your homeowner’s/umbrella coverage for domestic workers, and NJ workers’ comp requirements.

Total honest cost above the wage: roughly 10%, minus several thousand back through the tax benefits. For most families, legal pay is nearly a wash — with all of the risk removed.

Romanchuk CPA LLC is a fully virtual CPA firm serving individuals and business owners nationwide since 2014, with NJ/NY depth. Book a consultation at rfg.tax.

This article is general information, not tax advice for your specific situation. Figures adjust annually — verify current amounts.