How to Navigate Payroll When Hiring a Nanny

You found the nanny - congratulations!

This means interviews went well, references checked out, and your kids already adore them. Now comes the part almost nobody talks about: payroll.

It's easy to assume that paying a nanny is as simple as writing a check or Venmo-ing them every Friday, like you would a babysitter. It isn't — and treating it that way can put your family and your nanny at real financial and legal risk. 

Here's what you actually need to know.

You're a household employer now, not a client

The single most important mindset shift for a new nanny family is this: you are not hiring a freelancer, you're becoming a household employer. The IRS is explicit that nannies are employees, not independent contractors — which means a 1099 is the wrong form, full stop.

Placement agencies that work with career nannies, including Signature Nanny Placement, are firm on this point with the families they place: professional nannies expect and are entitled to be legally employed, the same way anyone working for a business would be.

That distinction is for your protection, as well as your nanny’s. 

Misclassifying a nanny as a contractor to avoid payroll taxes is considered tax evasion by the IRS, and it strips your nanny of protections like unemployment insurance and workers' compensation. It can also come back to bite you — years of unpaid back taxes, penalties, and interest don't disappear just because the arrangement felt informal at the time.

Why paying a nanny “under the table" isn't the easy shortcut it looks like

Paying in cash of course still happens across the industry — by some estimates, a large share of domestic workers are paid this way. But it's becoming riskier every year as enforcement increases and as more states pass legislation strengthening protections for household workers.

For the nanny, going unreported means no verifiable income history, which can make it hard to qualify for an apartment lease, a mortgage, a car loan, or a student loan. For the family, it means no legal footing if something goes wrong, and exposure to fines and back taxes if you're ever caught.

Reputable placement agencies steer families away from this arrangement for good reason: it undermines the professionalism of the role and puts everyone's future finances at risk for the sake of short-term simplicity.

What paying a nanny "on the books" actually involves

Once you accept that your nanny is a household employee, a few concrete steps follow:

Get an Employer Identification Number (EIN). This is your household's version of a business tax ID, used to report federal payroll taxes. You can apply for free directly through the IRS.

Register with your state. Most states require household employers to register for unemployment insurance and, where applicable, state income tax withholding. Some also require a new-hire report shortly after your nanny starts.

Understand which taxes apply. In general, once you pay a nanny above a certain threshold in a year (a figure that's indexed and adjusted periodically — currently in the low thousands annually), you're responsible for withholding and paying Social Security and Medicare taxes (FICA), splitting the cost with your nanny. You'll also likely owe federal and, in most states, state unemployment tax. Income tax withholding isn't legally required unless your nanny requests it, but many families do it anyway, so they aren't left with a surprise bill come tax season.

Issue a W-2, not a 1099. At year-end, your nanny needs a W-2 to file her own taxes, generally due by the end of January.

Do it yourself, or hand it off?

Families generally land in one of two camps:

DIY payroll works for some households, especially if you're comfortable with spreadsheets and calendar reminders for quarterly filings. It's the cheapest route, but it does take real time — industry estimates put the annual time commitment at somewhere between 50 and 60 hours a year once you account for calculations, filings, and responding to the occasional tax notice.

A dedicated household payroll service handles registration, tax calculations, filings, and W-2 preparation for a monthly fee, usually somewhere in the ballpark of $40–$50 a month plus an annual filing charge, though pricing varies by provider. 

This is the route most placement agencies, including Signature Nanny Placement, point families toward, since it removes the guesswork and the risk of a missed filing. Many families choose to work with professional household payroll companies that specialize in nanny and household employee payroll compliance.

Common providers include:

• HomePay

• Poppins Payroll

• GTM Payroll

• SurePayroll

These providers can assist with payroll processing, tax filings, direct deposit, year-end tax documents, and ongoing compliance requirements.

The bigger picture

Doing payroll properly isn't just a compliance checkbox — it's part of how you set the tone for the working relationship. 

A nanny who's paid legally can build Social Security and Medicare credit, qualify for unemployment if the job ever ends, and use her income to build a life outside your home: renting an apartment, financing a car, saving for retirement. 

Families who treat payroll as a serious, upfront responsibility — not an afterthought — tend to have smoother, longer, more trusting relationships with the caregivers in their homes.

If you've just finished a placement search and payroll is the last box left to check, don't wing it. Get your EIN, register with your state, and either commit to learning the process or hand it to a service that specializes in household employment. Your future self — and your nanny — will thank you.

*This post is intended as general guidance and isn't a substitute for advice from a tax professional or household payroll specialist familiar with your state's specific rules. We advise all of our clients to work with a tax professional well-versed in the industry.