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Household Employees: Understanding the Rules

Man cleaning bathroom mirror: household employee or independent contractor?

If you employ domestic workers like nannies, housekeepers, senior caregivers, private chefs or other in-home staff, it’s important to understand your responsibilities as a household employer and properly classify workers as household employees vs. independent contractors.

Determining Employee vs Independent Contractor

The Department of Labor recently updated its guidance on classifying workers, looking at factors such as:

  1. Opportunity for profit or loss based on managerial skill
  2. Investments by the worker and employer
  3. Degree of permanence of the work relationship
  4. Nature and degree of control by the employer
  5. Whether the work is integral to the employer’s business
  6. The worker’s skill and initiative

For household employees, key factors are the degree of control you have over how the work is performed, the permanence of the relationship, and whether the work is integral to running your household.

Commonly misclassified roles considered household employees include: Nannies, Au Pairs, Babysitters (if working in your home), Senior Caregivers, Housekeepers, Maids, House Managers Home Health Aides, Personal Care Aides, Chefs, Cooks, Butlers, Estate Managers, Property Managers

Your Tax Obligations as an Employer of Household Employees

If you employ household workers who were paid cash wages of $2,700 or more (household employee threshold in 2023 and 2024) or $1,000 in a calendar quarter, you have several tax compliance obligations:

  • Obtain an Employer Identification Number (EIN)
  • Keep payroll records and issue W-2 forms
  • Withhold Social Security/Medicare tax from employee wages
  • Pay your share of Social Security/Medicare tax (7.65%)
  • Pay federal and state unemployment taxes
  • Provide workers’ compensation insurance (in most states)

The nanny tax rules aim to ensure household employees receive the same minimum statutory benefits as workers at businesses. Remain compliant to avoid penalties and fines for misclassifying household employees as independent contractors.

Managing the Paperwork

While often overlooked, failing to comply with household employment tax rules can result in costly fines, interest and back taxes if audited by the IRS or state. Know the difference between a Schedule H and a Form 941.

HomeWork Solutions provides comprehensive payroll, tax and HR services tailored to busy families with household employees. Let us handle all your nanny tax obligations accurately and efficiently. Get a free quote for household payroll services.