Mid-January, a Seattle family got a panicked call from their nanny. “Where’s my W-2? I need it to file my taxes.” Long silence. The family had been paying her as a contractor, giving her 1099s instead of treating her as a household employee. They genuinely didn’t know they were doing anything wrong. The nanny, who’d been in professional childcare for twelve years, absolutely knew they were doing it wrong. She’d let it slide because she needed the job, but now she was filing taxes and the incorrect classification was creating problems for her. The family was horrified to learn they’d been violating tax law for two years, that they owed back payroll taxes they’d never paid, and that their nanny had every right to be frustrated with them. They’d thought they were just simplifying paperwork. They were actually breaking federal employment law.
This scenario plays out constantly with household employers who don’t understand their tax obligations. Many families have never employed anyone before, don’t know the rules, and make expensive mistakes out of ignorance rather than malice. Professional nannies, especially experienced ones, understand household employment tax law and they expect families to follow it. When families don’t, it creates problems for the nanny’s tax situation, exposes both parties to legal liability, and signals to the nanny that the family either doesn’t care about doing things properly or doesn’t respect household employment as real employment. We’ve been placing nannies in Seattle and across major markets for over twenty years, and we’ve seen the full spectrum of tax compliance from excellent to disastrous. Let’s talk about what families are actually required to do, what professional nannies expect, and how to handle household employment taxes correctly so you’re protecting everyone and maintaining professional relationship with valued employees.
The Basic Tax Law Reality
Your nanny is an employee, not a contractor, regardless of whether you want her to be. The IRS is very clear about this. If you control when someone works, where they work, and how they do their job, they’re an employee. That describes the nanny working in your home on your schedule following your instructions about childcare. There’s no legal way to classify your regular nanny as an independent contractor. Families who try are misclassifying employees, which is illegal and creates liability. As a household employer, you’re required to withhold and pay Social Security and Medicare taxes. That’s 7.65% that you withhold from your nanny’s pay, plus another 7.65% that you pay as the employer, for a total of 15.3% going to Social Security and Medicare. You’re also required to pay federal unemployment tax (FUTA) and in most states you’re required to pay state unemployment insurance. These aren’t optional, they’re legal requirements of employing household staff.
You’re required to file appropriate tax forms. That means W-2s for your employee showing wages paid and taxes withheld, Schedule H with your personal tax return showing household employment taxes, and potentially state-specific forms depending on where you live. Professional tax preparers can handle this or you can use household payroll services, but it must be done correctly. Your nanny is required to report her income and pay income tax on it. But how she’s classified affects how she pays. If you give her a W-2, she files normally with that documentation. If you incorrectly give her a 1099, you’re putting her in a difficult position where she has to explain misclassification to the IRS or pay higher self-employment taxes than she should owe.
Workers’ compensation insurance is required in most states for household employees. If your nanny is injured while working in your home and you don’t have workers’ comp coverage, you could be personally liable for medical costs, lost wages, and damages. This isn’t optional in states that require it, and even in states where it’s not technically required for household employers, it’s smart protection. Violating any of these requirements creates liability for you as the employer. The IRS can assess back taxes, penalties, and interest if they discover you’ve been paying your nanny incorrectly. Your nanny can also report the misclassification, which triggers IRS investigation. The financial exposure from getting this wrong is significant and it’s completely preventable by just doing things correctly from the beginning.
What Professional Nannies Expect
Experienced nannies who’ve worked in professional household employment know the rules and they expect families to follow them. They expect to be treated as employees, not contractors. That means W-2s, proper tax withholding, and employer payment of the employer’s share of taxes. They’re not asking for anything special, they’re expecting legal minimum compliance. They expect to receive their W-2 by January 31st as required by law. Professional nannies need this document to file their tax returns. Families who are late with W-2s or who don’t provide them at all are creating significant problems. The IRS deadline isn’t flexible, and nannies have the right to receive required documentation on time.
They expect accurate reporting of all compensation. If you paid bonuses, provided health insurance, gave them a vehicle, or provided any other compensation beyond regular wages, that needs to be reported correctly. Nannies know what should and shouldn’t be on their W-2, and inconsistencies raise red flags. They expect you to pay the employer portion of payroll taxes rather than trying to make them responsible for the full amount. Some families try to classify nannies as contractors specifically to avoid paying the employer share of taxes. That’s illegal and it shifts tax burden inappropriately to the employee. Professional nannies won’t tolerate it.
They expect unemployment insurance to be in place so they’re protected if employment ends. Nannies who’ve been misclassified and then lose their jobs discover they can’t collect unemployment because the employer never paid into the system. That’s a genuine hardship that professional nannies are aware of and want to avoid. They expect workers’ compensation coverage for their protection. Nannies understand that household work involves physical risk and they want to know they’re covered if injured. Families who don’t have workers’ comp are exposing both parties to risk.
They expect professionalism around tax documents and employment records. That means organized record-keeping, clear paystubs showing what was withheld, and responsive communication if questions arise about tax documentation. The families who treat household employment casually and don’t maintain proper records signal to nannies that they’re not taking the employment relationship seriously.
Common Tax Mistakes Families Make
The most common mistake is misclassifying nannies as independent contractors. Families do this because it seems simpler, because they don’t want to deal with payroll taxes, because they don’t understand the rules, or because someone told them it’s fine. It’s not fine, it’s illegal, and it creates liability. Another frequent mistake is paying cash under the table with no tax reporting at all. This seems like it benefits everyone because both parties avoid taxes, but it’s illegal for both the employer and the employee. It also leaves the nanny with no proof of income when she needs it for loans, housing applications, or benefits. It leaves her without unemployment protection or Social Security credits she’s earning. The short-term tax savings create long-term problems.
Many families incorrectly report what’s taxable. They think they can pay their nanny partly as wages and partly as “reimbursements” or “stipends” that aren’t reported. Generally, everything you pay your nanny is taxable compensation unless it’s a legitimate reimbursement for work-related expenses she paid for on your behalf. Gas money for taking kids to activities in her car? That’s likely legitimate reimbursement if documented properly. “Gas stipend” that’s really just part of her compensation called something else? That’s taxable wages. Families often miss filing deadlines. W-2s due January 31st, tax payments quarterly, Schedule H with annual return, various state deadlines. Missing these creates penalties and interest that are completely avoidable with proper planning.
Some families try to pay family members or friends informally without proper tax handling. The rules don’t change just because your employee is your cousin or your neighbor. If they’re working for you regularly as a nanny, they’re a household employee subject to all the same tax requirements as anyone else. Families frequently underestimate the cost of doing household employment correctly. They budget for the nanny’s gross wage but forget the employer payroll taxes, unemployment insurance, workers’ comp, and payroll service fees if they use one. Then they’re shocked by the actual cost and try to cut corners to stay in budget, which creates compliance problems.
How to Get It Right
The easiest approach for most families is using a household payroll service. Companies like GTM Payroll Services, HomePay, Poppins Payroll, and others specialize in household employment and handle everything. They calculate taxes, file required documents, provide paystubs, process W-2s, and keep you compliant. The cost is typically $100-300 monthly depending on the service and your situation, which is absolutely worth it to avoid the liability and complexity of doing it yourself. If you want to handle it yourself, you’ll need to register as a household employer with the IRS, get an Employer Identification Number (EIN), set up state tax accounts, calculate withholding correctly, make quarterly tax payments, file Schedule H with your annual return, process W-2s, and maintain proper records. It’s doable but it’s complex enough that most families benefit from professional help.
At minimum, you need to understand what you’re required to withhold and pay. Social Security is 6.2% of wages up to the annual wage cap (around $168,600 for 2024), Medicare is 1.45% of all wages, and you pay matching amounts as the employer. Federal unemployment tax is 6% on the first $7,000 of wages, though you can get credit for state unemployment taxes paid, effectively reducing it to 0.6% in most cases. State unemployment and other state taxes vary by location. Your payroll service or tax advisor can help you understand your state’s specific requirements. Keep meticulous records of everything. Every payment, every tax deposit, every paystub, every form filed. If you’re ever audited or if your nanny files for unemployment or has questions about her W-2, you need documentation proving you did everything correctly. Good records protect you.
Communicate with your nanny about the tax setup from the beginning. During hiring, explain that you’ll be handling employment correctly with proper payroll and tax withholding. Confirm her Social Security number and citizenship/work authorization documentation as required by law. Make sure she understands what will be withheld from her gross pay so there’s no confusion when she receives her first check. Provide clear paystubs showing gross wages, all withholdings, and net pay. Professional nannies expect this documentation and appreciate employers who handle it properly. Issue W-2s on time every January. This is non-negotiable. Your nanny needs her W-2 to file her taxes by the April deadline, and you’re legally required to provide it by January 31st.
What To Do If You’ve Been Doing It Wrong
If you discover you’ve been misclassifying your nanny or not handling taxes correctly, fix it immediately going forward and address the past situation. Stop misclassifying now. If you’ve been giving her 1099s, switch to proper employee classification with W-2s. If you’ve been paying cash under the table, set up proper payroll. Don’t continue doing things wrong just because you’ve done them wrong in the past. Consult with a tax professional or household employment specialist about addressing back taxes. Depending on how long you’ve been non-compliant and how much you owe, the solution might involve filing corrected returns, paying back taxes with penalties and interest, and potentially participating in IRS voluntary classification settlement programs that reduce penalties for employers who come forward voluntarily.
Have an honest conversation with your nanny about the situation. Apologize for the error, explain that you’re fixing it, and discuss how it affects her. If she’s been receiving 1099s, she may have been paying higher self-employment taxes than she should have been paying. You might owe her compensation for that overpayment. Handle this ethically and make her whole if your mistake cost her money. Understand the potential liability you’ve created. In the worst case scenario, the IRS can assess years of back payroll taxes, unemployment taxes, penalties, and interest. The total could be substantial. Your nanny could also have legal claims against you for misclassification. Taking this seriously and addressing it promptly limits the damage.
Consider whether to make a voluntary disclosure to the IRS. In some situations, coming forward voluntarily and correcting the problem yourself results in reduced penalties compared to being caught during an audit or reported by an employee. A tax professional can advise whether this makes sense in your situation. Learn from the mistake and commit to full compliance going forward. The families who handle this well take responsibility, fix the problem, make things right with their employee, and then maintain perfect compliance afterward.
The Cost of Doing It Right
Yes, proper tax compliance costs money beyond your nanny’s gross wages. Factor in the employer’s share of payroll taxes (7.65%), federal and state unemployment taxes (varies but usually 1-3% combined), workers’ compensation insurance (varies widely by state but might be $500-2000 annually for one employee), and payroll service fees if you use one ($1200-3600 annually). For a nanny earning $50,000 annually, the total additional cost might be $6,000-8,000 between taxes, insurance, and administrative costs. That’s substantial, but it’s the actual cost of household employment when done legally.
Build these costs into your budget from the beginning. If you can afford $50,000 gross wages, you need to budget $56,000-58,000 total cost to cover all the legally required expenses. Don’t make hiring decisions based only on gross wages and then scramble to figure out how to pay the additional costs later. Understand that trying to save this money by misclassifying or paying under the table exposes you to far greater cost if you’re caught. The penalties and back taxes can easily exceed what you would have paid if you’d just done it correctly. Plus you’ve damaged your relationship with your employee and created legal liability. The “savings” from improper tax handling aren’t savings at all, they’re deferred liabilities that will eventually come due, usually at the worst possible time.
Professional families in Seattle and everywhere else need to understand that household employment has real costs beyond just wages. Those costs aren’t optional, they’re legal requirements. Families who can’t afford to employ household staff legally can’t afford household staff. Find other solutions rather than creating illegal employment arrangements that harm employees and expose you to liability.
Why This Matters to Your Relationship
How you handle taxes and employment compliance tells your nanny a lot about you as an employer. Families who do it right signal professionalism, respect for household employment as real work, and willingness to follow the law even when it’s complex and expensive. That builds trust and respect. Families who do it wrong signal either incompetence or disregard for proper employment practices. Both erode trust. Your nanny is more likely to stay long-term with a family that treats her employment professionally. Proper tax handling is part of that professionalism. Being able to document income properly matters for your nanny’s financial life beyond just taxes. She needs proof of income for housing applications, car loans, credit cards, mortgages. Families who pay under the table prevent their nannies from building financial lives properly because they have no documented income.
Professional nannies talk to each other. If you’re known in the nanny community as a family that doesn’t handle employment correctly, you’ll struggle to hire quality candidates. Good nannies avoid families with reputations for improper tax handling or employment violations. When professional nannies ask you about tax handling during interviews and you explain your proper compliance, that distinguishes you from families who fumble the question or admit they don’t handle it correctly. You immediately stand out as a serious employer worth working for.
Your nanny’s long-term financial security is affected by whether you pay into Social Security and Medicare properly. Those contributions add up over a career to determine her retirement benefits and Medicare eligibility. Families who don’t handle payroll taxes correctly are literally stealing from their nanny’s future retirement security. That’s not hyperbole, that’s the practical reality of denying someone the Social Security credits they’re legally entitled to. If you care about your nanny as a person and value the work she does for your family, handle her employment in ways that protect her present and future financial wellbeing. That means doing taxes correctly, no shortcuts, no misclassification, full legal compliance.
After twenty years in this industry, we can tell you with certainty that the families with the best long-term nanny relationships are the ones who treat household employment with the seriousness and professionalism it deserves. That includes getting tax compliance right from day one. It’s January, W-2s are due, families are thinking about taxes. If you’re a Seattle family or a family anywhere employing a nanny, use this as your moment to ensure you’re doing everything correctly. Your nanny expects it, the law requires it, and your relationship with valued household staff depends on it.
