The type of employee you are determines which tax forms you file and how you are paid.

Are you a household employee? Or are you an Independent Contractor?

Almost ALL nannies and domestic staff working in and around a home are household employees based on the nature of their job. Independent contractors that receive 1099 forms are self-employed and end up paying twice as much in taxes as a household employee receiving a W-2 and they are not eligible for unemployment benefits.

Independent Contractor:

• Works under own conditions

• Sets own schedule

• Uses their own supplies

• (Needs to file a W-9 upon hire and receives a 1099 come tax time)

Household Employee:

• Takes instruction from employer

• Has schedule set by employer

• Provided tools and equipment

• (Needs to file a W-4 upon hire and receives a W-2 come tax time)

As of 2023, the IRS defines a household employer as an individual that pays $2,600 or more gross pay in a calendar year to a household employee. They need to comply with all tax, wage, and labor laws that impact household employment and they will be penalized for not doing so. The taxes they pay are in addition to the gross wages paid to their employees. They are responsible for ensuring that both their portion and their employee’s portion of Social Security and Medicare are paid, and they must also contribute to unemployment taxes.

Why should I care how my employer files my taxes?

• For a household employee that receives a W-2 it’s important to remember that both the employee and employer EACH owe 7.65% in Social Security and Medicare (6.2% for social security tax and 1.45% for Medicare tax). Independent contractors are considered self-employed and pay both the employer AND employee shares of taxes, resulting in twice as much (15.3%) in taxes. Some employers try to pay their their household employee as an independent contractor to avoid paying taxes, and then the employee then ends up owing the full 15.3% in taxes. In addition, if you are misclassified as an independent contractor you will not be eligible for unemployment benefits if you lose your job due to no-fault of your own.

• GTM Payroll Services does a great job of describing Nanny taxes here.

• Household employers can also withhold federal and state tax for you from your paycheck. This way you don’t need to worry about setting enough money aside to pay those when taxes are due.

The question of whether to get paid “on the books” vs cash is a common one. As a former nanny myself, I understand that there is a lot of confusion in the private staffing and childcare industry when it comes to household employee tax and nanny tax. From our personal experience as well as standards encouraged by the industry we strongly recommend encouraging your employer to use an employee payroll service and withhold employee taxes to avoid confusion or trouble later down the line. (Note: employers receive some benefits from paying legally!). If your employer pays you cash, and does not withhold taxes for you, you will be responsible for the full 15.3% of Social Security and Medicare tax rate yourself and you will be missing out on unemployment insurance.

Here is a PDF describing in detail the benefits of legal pay for household employees, listed here:

• Verifiable Income

• Legal Employment History

• Unemployment Benefits

• Social Security and Medicare Benefits

• Workers’ Compensation Benefits

*** Friendly Reminder: Always negotiate your hourly rate in terms of “gross” pay, or pay before taxes are taken out, but keep in mind how much you need to make in “net” or take-home pay. This ensures you will not be underpaid, helps calculate overtime, and it helps keep things consistent when comparing salaries in the industry. This nanny tax calculator that GTM Payroll Services offers can be a helpful resource. ***

We recommend utilizing GTM Payroll Services. GTM is a premier payroll agency and knows all of the ins and outs of paying household employees properly. Register using our link or mention our name to waive your setup fee - a $95 value.

You’ve got enough on your plate in your day-to-day life — let us make your life easier by handling your unique household staffing needs.

If you are a family looking to hire a nanny, household employee or other home service, submit an application with My Household Managed.

If you are a professional nanny, house manager, or other household employee looking for a job, apply at My Household Managed.