A lot of families start out paying their nanny in cash. It feels simpler in the moment, especially when you're still figuring out schedules, routines, and a hundred other things. But paying on the books is genuinely better for everyone involved, and it comes with real benefits most families don't know about. Here's what that actually looks like in practice.
First: Why This Matters for Your Nanny
When you pay your nanny legally, you're not just doing paperwork. You're making sure they can actually benefit from the work they're doing for you.
- They build Social Security and Medicare credits that count toward their retirement and benefits down the road.
- They're covered for unemployment if the job ever ends for reasons outside their control.
- They have documented income they can use to rent an apartment, get a car loan, or qualify for a mortgage.
- They're protected by your workers' comp if something unexpected happens on the job.
The people who take care of our children deserve those things. Paying properly is how we make sure they get them.
And Here's What's in It for You
Paying on the books isn't just good for your nanny. It opens up some meaningful financial benefits for your family too.
- Dependent Care FSA. If your employer offers one, you can contribute up to $5,000 pre-tax to cover your nanny's wages. That's real money back in your pocket at tax time.
- Child and Dependent Care Tax Credit. Families who pay legally may qualify for a federal tax credit of up to $3,000 for one child, or $6,000 for two or more.
- Protection from unexpected tax bills. Paying legally means no surprise back taxes, penalties, or interest down the road.
- Workers' comp coverage. Workers' compensation is only available when wages are paid legally. If your nanny is ever hurt on the job and there's no coverage in place, out-of-pocket medical costs can add up fast, even for a minor injury.
- A clean paper trail. When everything is documented, you're protected if questions ever come up about wages, hours, or overtime.
Good to know: In 2026, the federal household employment tax threshold is $3,000. Once you cross it, taxes apply retroactively back to the very first dollar you paid — not just wages above the threshold. Most families reach $3,000 quickly, so setting things up from the start is always the smoothest path.
What "Paying on the Books" Actually Involves
Here's the honest version: there are a few moving parts, and it's worth understanding them before you start. For specifics on your state, check out our state-specific nanny employer tip sheets.
- Get an EIN. An Employer Identification Number is your employer tax ID. It's free to get from the IRS and takes about 10 minutes online.
- Register with your state. Most states require a separate registration for state income tax withholding and unemployment insurance. The requirements vary by state.
- Set up payroll. Each pay period, you'll track gross wages, withhold your nanny's share of FICA taxes, and withhold any income taxes at the federal, state, and local level per the instructions on tax authority withholding forms, like the W-4. You'll also set aside the employer portion of FICA. You’ll get those funds and documentation over to the tax authorities per their individual schedules. At year-end, you'll issue a W-2 and file Schedule H with your personal tax return.
That's more than just handing over cash, which is why a lot of families work with a household payroll service to manage it. You can absolutely set it up yourself’ the IRS estimates it will take you about 62 hours per year, but having someone who knows the rules handle the ongoing compliance means one less thing to track.
The Short Version
Paying your nanny on the books means both you and your nanny are protected. You're eligible for meaningful tax benefits, and there are no surprises waiting down the road. It does take some setup, but you don't have to do it alone.
HomeWork Solutions sets families up correctly from the start and handles the ongoing payroll so you can stop thinking about it. If you're not sure where you stand or where to begin, reach out, and we'll walk you through it. All of our consultations are complimentary.