How to Get Started Creating a Nanny Payroll Account

8 steps to jump-start the nanny tax process.

mom on the computer

You've finally found the nanny of the dreams. Now you can finally enjoy some peace of mind, right? Well, almost. Hiring the perfect nanny is the hardest part, but there's one more important task -- setting up your payroll correctly.

This important step will keep you out of legal trouble, enable you to take advantage of the childcare tax breaks and make sure the person taking care of your children receives professional benefits and protections.

But where do you start? Confusing legal jargon and heaps of paperwork cause many families to hide under the table. Don't worry. You'll be surprised at how easy the nanny tax process can be. Here is our step-by-step guide to creating a nanny payroll account.

  1. Confirm You Are Required to Report
    Before you start the payroll process, you want to be sure you are required to pay the "nanny tax." Some nannies work part-time or unusual hours making many families unsure of their exact legal and financial obligations. The simple approach is to take a look at your nanny's wages. Does it add up to $1800 or more in a calendar year? If so, you are required to withhold Social Security and Medicare taxes from their paycheck and pay employer payroll taxes.

  2. Talk to Your Nanny
    Paying the "nanny tax" has an obvious impact on your nanny's take-home pay. You'll want to make sure the compensation is defined with both gross and net figures, so your agreement is crystal clear. Take the time to have a candid conversation about how you plan on handling her paycheck, taxes, overtime pay, holidays and other details. We recommend creating at least a simple nanny contract to make your agreement official and avoid future disputes.

  3. Find a Payroll Service
    Yes, you can handle the nanny tax process on your own, but this means an estimated 50 hours of preparing tax returns, performing complex calculations, and studying the ins-and-outs of federal and state household employment tax law. An accountant might also be able to help, but most are not experienced in this highly-specialized area of tax law. Additionally, most accountants are not set up to manage payroll or provide the ongoing support and guidance on labor law issues that most families need

    You may want to check out Care.com HomePay, managed by Breedlove. The service can help families take all the work and worry out of being a household employer by filing the nanny tax payroll for you!

  4. Gather the Necessary Documents
    To set up payroll service, you'll need to pull together certain information about you and also your employee.

    For you, this includes:

    • Your primary contact information
    • Social Security number
    • Federal and state tax information
    • Your employee's compensation
    • Any payroll payments you've made to-date
    • Bank account information
    • If you file "Married Filing Jointly," your spouse must alsprovide their personal information

    For your employee, you'll need:

    • Contact information
    • Social Security information
    • Federal income tax withholding selections
    • State income tax withholding selections
    • Bank account information should they want to be paid through direct deposit.
  5. Verify Worker Eligibility
    If you don't have a payroll service, you'll need to use Form I-9 to verify your employee's eligibility to work in the U.S. The I-9 does not get sent to any government agencies but must be presented to authorities if your worker's employment eligibility is ever questioned.

  6. Set up a Regular Pay Schedule
    Once you and your nanny agree on a pay schedule, stick to it! Determine how often he or she wants to be paid (weekly or bi-weekly) and calculate how much must be withheld each pay period. Make sure your nanny understands what this means in terms of her net salary.

  7. Handle Overtime Correctly
    If you don't use a payroll service, you'll need to make sure to manage any overtime correctly. If your nanny works over 40 hours in a week, you must pay them time-and-a-half for the hours over 40. Live-in nannies generally are not entitled to overtime, but are simply paid for every hour they work (Note: there are special overtime requirements for live-in employees in New York, Massachusetts, Maryland, Maine and Minnesota. Consult your state or Care.com HomePay for details if this applies to you).

  8. File Quarterly Employment Tax Returns & Year-End Documents
    If you handle payroll on your own, you'll need to keep track of the wages paid (and taxes withheld) so you can file state and federal employment tax returns. The state and federal deadlines are different, but generally they are due on a quarterly basis. At the end of the year, you'll provide a Form W-2 to your employee, file a Form W-2 Copy A/Form W-3 with the Social Security Administration, file a state annual reconciliation (most states) and file Schedule H with your federal income tax return.

  9. For an easy way to find out how much you'll be paying in nanny taxes and saving on tax breaks check out our nanny tax calculator!

Your Next Steps:
* The tax information contained in this article should not be used for any actual nanny relationship without the advice and guidance of a professional tax advisor who is familiar with all the relevant facts. The information contained herein is general in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for your specific circumstances and may require consideration of other matters.
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Comments (6)
Photo of Julia R.
Julia R.
There needs to be some more tax consideration in general for household employers. We are a different fit than the typical employer, yet we are obligated to the majority of the employer and tax requirements.

I'm trying to do everything the"right" way and it is very to confusing to make sense of all of the employer obligations (UC, BWC, Ohio Income, Federal Income, Medicare, Local taxes and ohio school district taxes) AND obligations towards our own personal taxes (switching to filing quarterly tax estimates, filing schedule H).

This all takes WAY too much time for working parents who just want to hire someone to watch their kids at home, so they can go out and work! It should tell you something when companies make money off of managing people's "Nanny Taxes." Nothing against the Care.com service and other, but we should be able to figure this stuff out for ourselves - not feel like we need to hire someone to do it. No wonder why so many people do it "under the table." I even work part-time. I can't imagine someone trying to figure this out while working full-time. The Ohio 1st Stop for Business and Ohio Business Gateway appear to be aimed at making things simpler, but I find they are just part of the patchwork I had to figure out.

I have no problem paying what I owe what is rightful under the law, but can't we make it easier? Is there really need for household employers to file almost everything quarterly (state, local, school district tax, unenployement)? I think not.

If household employers are exempt from withholding federal and state income taxes for their nannies and housekeepers, then why are they not for local school district taxes? Why can't the nanny simply pay what he/she owes at the end of the year, just the same as federal and state income taxes? Then there would be some consistency.

When finding affordable and reliable child care is a national issue, I would think there would be some impetus to create simplified, cohesive filing deadlines and regulations that are friendly to the working family.
Posted: January 26, 2014 at 1:49 PM
Stephanie Breedlove
Hi Brittany!

My name is Stephanie Breedlove and I am the head of Care.com HomePay. The requirement for having taxes withheld via payroll only comes into effect when you earn $1,800 or more from each family you work for. The threshold is per family, so if you earn $900 from a family pet sitting, but also earn $3,000 from a different family babysitting, only the family you babysit for needs to withhold taxes. That being said, both you and the families you do occasional work for need to keep track of your wages to make sure you're not crossing those important tax thresholds.

In terms of how you get paid, it is okay to be paid in cash even when working for families that must withhold taxes as long as the family is providing you with a paystub showing what your gross wages are, the taxes they withheld and ultimately what your net pay is. Your net pay will be what you are paid in cash with. I would highly recommend getting a savings and checking account established though because it makes things easier on the families you work for and it's just a good thing to do moving forward in your life. Any bank in your area will be happy to help you do this.

I wish you the best of luck with your ongoing job search Brittany and I hope I've helped you understand the rules in your current situation.
Posted: October 28, 2013 at 10:01 AM
Photo of Brittany B.
Brittany B.
How does this work if you don't have a bank account and don't have federal/state income tax? My situation is that I basically live with my grandmother for free and have no bills/car payments/etc to pay (everything is currently being paid for by my father and grandmother until I'm able to get a stable job). Any babysitting/pet care jobs I've done has just been the occasional paid in cash types.
Posted: October 28, 2013 at 7:03 AM
Karen K.
what to do when family refuses to pay you two wks. because you quit.
Posted: June 25, 2013 at 3:46 PM
Photo of Tamelia P.
Tamelia P.
How much does a full time nanny get paid? She would be keeping my 2 children, cooking meals, doing laundry and grocery shopping for me?
Posted: November 02, 2012 at 11:21 PM
Photo of Valerie D.
Valerie D.
Fantastic information all in one place...great...printing this one out for sure!
Posted: September 27, 2012 at 9:50 PM
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