For high-net-worth families and individuals in Chicago, the decision to hire private service professionals such as nannies, house managers, housekeepers, estate managers, and private chefs is often driven by the desire for exceptional service and personalized care. While the primary focus is on finding the perfect fit for their households, it's crucial to explore the potential tax benefits that come with hiring a nanny in Chicago. Understanding the tax implications can make a significant difference in the overall cost of household employment.

Is hiring a Nanny tax deductible in Chicago?

In Chicago, as in the rest of the United States, individuals who hire household employees, such as nannies, house managers, housekeepers, estate managers, and private/personal chefs, may be subject to specific tax obligations, but also eligible for certain tax benefits to offset the cost.

What is the ‘Nanny Tax’?

The commonly referred to "Nanny Tax" is not a standalone tax but rather a combination of federal and state taxes that apply when hiring household employees. A family who hires a nanny will owe Social Security and Medicare taxes (commonly known as FICA taxes), federal and state unemployment taxes for their employee. They may also wish to withhold money for their employee’s annual income tax so that they don’t owe their entire year’s tax obligation when they file their return. It is also important to note that the nanny tax isn’t just for full-time nannies but could also include household employees like:

after-school nannies/tutor
school vacation nannies
home education teachers
babysitters with regular hours

You will likely need to pay nanny taxes if you employ someone to work in your home and they make $2,700 or more in gross wages in 2024 (or $2,600 in 2023).

What tax benefits are there if I hire a Nanny in Chicago?

Whilst there are tax obligations as a household employer, there are also two main tax benefits that you can take advantage of when hiring a a nanny in Chicago or indeed, across the USA.

1. Dependent Care FSA

First off, as an employer you could put your nanny expenses into a dependent care FSA account. This is a type of flexible spending account or FSA. With an FSA, funds are taken straight from your pay pre-tax which means you’ll be lowering your overall tax obligation, for both FICA and income taxes - meaning you’ll pay less tax overall!

To qualify for a dependent care FSA, you have to be paying your nanny legally. Read more about the benefits of legal pay here.

To read more about how to get started with a dependent care FSA, we recommend this article from one of the My Household Managed approved partners, GTM Payroll & HR.

2. Child and dependent care credit

If you’re a family with two working parents, you can claim up to $2000 per qualifying dependent child per year in childcare. Of this, a certain portion is also potentially refundable through an additional child tax credit. Read more about who is eligible and how to qualify for child and dependent care credit here.

If you’re eligible and want to take advantage of this tax deduction for childcare in your home, you will file IRS Form 2441.

Who is eligible for tax deductions when hiring a Nanny?

To qualify for either of these tax deductions, your nanny must be paid legally, and the children should be under 13 years old. The expenses must be due to both parents working, looking for work, or being full-time students. For more detailed information, you can visit the provided GTM webpage here.

If you want to read more about yearly bonuses, raises and holiday pay for your nanny, read our blog on the topic.

What else do I need to know about tax when hiring a nanny?

Our top tip for anyone hiring a nanny or household employee in Chicago is that it is essential for families to maintain accurate records of their nanny's wages, tax withholdings, and any other relevant expenses. This includes keeping track of hours worked, Social Security and Medicare contributions, and any reimbursements for job-related expenses.

Families should issue a W-2 form to their nanny at the end of the tax year, reporting the wages paid and the taxes withheld. This not only ensures compliance with IRS regulations but also provides the necessary documentation for the family to claim eligible tax credits and deductions.

Hiring a nanny in Chicago can offer more than just the convenience and security of personalized childcare; it can also bring about valuable tax benefits for high-net-worth families. From federal tax credits to potential state and local incentives, understanding and navigating the tax landscape is crucial for maximizing savings.

At My Household Managed we always advise our families to seek professional guidance to help them navigate the complexity of tax regulations and ensure they are compliant.

Not sure where to start with hiring a new nanny, housekeeper or house manager?

My Household Managed takes a consultative and personalized approach to household staffing.

We help you hire domestic staff qualified to fit your unique needs, saving you time and providing peace of mind.

Let us help you find the best nanny, house manager, housekeeper or any other domestic employee you may be searching for and register with My Household Managed.