Household Employment, Done Legally: Taxes, Contracts, and Fair Pay
Household employee taxes, nanny payroll, the written contract and the NDA — the unglamorous paperwork that protects your family, your staff, and everything you have built.
Nobody dreams about payroll. You dream about the house running beautifully — the nanny your children adore, the housekeeper whose standards exceed your own, the driver who is simply always there.
But the moment you pay someone to work in your home, a body of law quietly walks in with them: household employee taxes, nanny payroll obligations, the written contract, and, in a house like yours, the NDA. Families get this wrong in one direction only — casually.
Cash in an envelope, a handshake for a contract, a 1099 for a person who is plainly an employee. It feels informal right up until it becomes a tax problem, a wage claim, or an injured employee with no coverage and a lawyer. Done legally, household employment is not difficult.
It is a system: classify correctly, pay properly, write it down, insure the risk. This is that system, whole.
First, the Truth: You Are an Employer
Everything begins with classification, and the Internal Revenue Service's test is disarmingly simple. As LegalClarity's guide to Schedule H requirements summarises the IRS position: if you decide not only what work gets done but how it gets done, the worker is your employee.
The nanny whose schedule you set, the housekeeper who follows your routines, the caregiver who works your hours — employees, every one, whether the work is full-time or part-time, hourly or salaried, found through an agency or through a friend. The label in your head does not matter; the control you exercise does.
A genuine independent contractor is a different creature: the cleaning company that sends its own crew with its own supplies and methods, the landscaper who serves a dozen houses and directs his own work. Those businesses employ their people and carry their own taxes — that is what you are buying when you hire a firm.
The expensive error is the middle case, dressed up as the second: a person who works only for you, on your schedule, under your direction, whom you pay as though they were a business.
Care.com's nanny tax guide is blunt about the consequence: families that misclassify a household employee as an independent contractor and issue a 1099 instead of running payroll can be charged with tax evasion. The savings were never real. They were a loan from the IRS, at penalties and interest.
The Tax Stack, in Plain English
Once you accept that you are an employer, the federal machinery is smaller than its reputation. Start with an Employer Identification Number — an EIN is not your Social Security number, and household employment runs on it.
IRS Publication 926, the Household Employer's Tax Guide, requires your EIN on the forms you file for your household employee, and it is the number that belongs on the W-2 you will issue at year-end.
Alongside it, complete Form I-9 to verify each employee's eligibility to work, and keep the paperwork the way employers keep it: organised, and for years, not months.
The taxes themselves come in three familiar pieces. Social Security and Medicare — FICA — apply once you pay a single household employee cash wages at or above the threshold the IRS sets in Publication 926, currently $3,000 in a calendar year.
Each side pays 7.65 percent: 6.2 for Social Security, 1.45 for Medicare, your share matched by the share withheld from your employee's pay.
Federal unemployment tax — FUTA — is triggered separately and earlier: it applies when total cash wages to household employees reach $1,000 or more in any calendar quarter, at 6.0 percent on the first $7,000 of each employee's wages, usually reduced to an effective 0.6 percent by the credit for state unemployment taxes paid.
Federal income tax withholding, by contrast, is not required: you withhold it only if your employee asks and you agree — many employees prefer it, and agreeing is a kindness that costs you nothing but a line in the payroll run.
All of it is reported in one place. Household employers do not file business payroll returns for this; they file Schedule H with their personal Form 1040, and the same form carries the FUTA liability that a business would put elsewhere.
Each employee receives a Form W-2 — Publication 926 requires a separate W-2 for each household employee paid Social Security and Medicare wages at or above the threshold — furnished to the employee and filed, with Form W-3, with the Social Security Administration by the end of January.
Beneath the federal layer sits your state's own stack: state unemployment insurance, any state withholding, and in a growing number of states and cities, paid-leave programmes and domestic-worker protections. The stack varies by address, which is precisely why the next decision matters.
Payroll: Do It Properly, or Buy It Done
You can run household payroll yourself. Families do — and then discover what the task actually contains: registrations, quarterly and year-end filings, rate changes, wage notices, and correspondence with agencies that do not accept "I didn't know" as a filing position.
Care.com's guide puts a number on the burden: the IRS estimates the average family can expect to spend 50 to 55 hours a year correctly managing the nanny tax process. Fifty hours of a principal's year, spent on arithmetic the household payroll services exist to absorb.
A specialist service registers you, calculates every withholding, produces the pay stub and the W-2, files Schedule H inputs, and — the part worth the fee — answers the notices. Whichever route you choose, the standard is identical: every pay period documented, every stub showing rate, hours, deductions and net, and records retained for at least four years.
Payroll is a memory you are legally required to keep; keep it well.
One discipline protects you more than any other: talk gross, never net. A promise of a round take-home figure sounds generous and behaves like a trap, because the gross wage required to produce it shifts with every withholding change — and someone must absorb the difference, in writing or in resentment.
State the gross hourly rate, show the deductions plainly, and let the stub tell the truth. The families who keep staff for a decade are not the ones who paid in envelopes and hoped.
They are the ones whose people could show a lender, a landlord, or an immigration officer a clean, documented income — because their employer treated the job like a job.
The Written Agreement: Where Good Houses Are Actually Made
If payroll is the skeleton, the written work agreement is the relationship itself. Verbal understandings decay; paper remembers. A proper household agreement reads like a professional offer, because it is one.
Poppins Payroll's guide to the nanny contract sets out the compensation core every agreement should carry: the base hourly rate — including the hourly rate assumed inside any salary — the overtime rate, the payment schedule, the number of regular and overtime hours expected in a pay period, and eligibility for bonuses and for annual or bi-annual raises.
Write the raise review into the document. A person who can see their next review on the calendar does not spend the year wondering where they stand.
Around the money, build the whole working life. Duties, listed specifically — the tasks named are the job, and the tasks not named are a conversation, not an assumption; duty creep is the fastest solvent of goodwill in a home.
Guaranteed hours: the professional norm under which the employee is paid for the agreed hours whether or not the family uses them, because your holiday abroad does not unpay the person who held those hours for you. Paid time off, sick days and named paid holidays.
A health-insurance contribution where you offer one — at this level, most serious households do. Mileage reimbursement when the employee drives their own car on your errands. Travel terms if the role travels: travel days are work days, with rest and accommodation thought through, not improvised.
And the ending, written at the beginning: notice periods on both sides, severance where you intend it, and the return of keys, cards and property. None of this is cold. All of it is what respect looks like when it is made durable.
Overtime and Fair Pay: The Reality, Not the Custom
Here is the sentence that surprises more principals than any other in this article: household employees are covered by wage-and-hour law.
Live-out household employees must be paid at least time-and-a-half for hours worked over 40 in a workweek — and a salary that quietly absorbs unlimited overtime does not satisfy the law for non-exempt household work, however generous the salary feels.
The employee must also be paid at least the highest applicable minimum wage among the federal, state and local rates where the work is performed.
Live-in arrangements carry their own variations: federal law treats live-in overtime differently, while some states require overtime for live-in staff as well — which is why "the last family didn't pay overtime" is not a legal standard and never was. Track hours honestly, including the evening that runs long and the weekend that fills in.
If the house regularly needs sixty hours, the lawful and humane answer is a schedule, a second person, or an overtime budget — not a blind eye.
Fair pay at this level is also strategy. The market for excellent household staff is small, networked and unforgiving: the finest nannies, housekeepers and managers know one another, and houses acquire reputations.
Pay at or above the going rate for mastery, review it on the written schedule, and fund the benefits that make a post a career — health contribution, paid leave, retirement where offered. What that buys is not gratitude. It buys the thing money is actually for in a staffed house: continuity.
Your children keep the nanny they love. Your house keeps the standards it runs on. Turnover, with its retraining and its risk, is the expensive option wearing a cheap disguise.
In the domestic staffing industry, discretion and trust are key.— MyStaffHQ, on NDAs for domestic staff
The NDA, Done Properly
Your staff will see everything: the marriage's weather, the children's struggles, the guests, the finances left on a desk. A non-disclosure agreement does not create discretion — character does that — but it defines it, in writing, before it is ever tested.
MyStaffHQ's guide to NDAs for domestic staff describes the instrument plainly: a legal agreement requiring employees to keep the family's private information confidential, protecting privacy, security and reputation.
Its typical scope covers family routines, property and security details, financial information, personal matters and the identities of guests; its consequences for breach run from termination to legal action; and its obligations commonly survive the end of employment — the confidence does not expire when the job does.
Draft it like a professional, with a professional. Sign it at hiring, as part of the offer, so the job itself is the consideration that supports it.
Keep its scope tied to genuinely private information — an agreement so broad it claims everything protects nothing particularly well, and no agreement can lawfully forbid an employee from reporting what the law requires to be reported.
Role-tailor where it matters: the nanny's clause speaks to children, images and social media; the house manager's speaks to accounts, vendors and security systems. And pair the NDA with practice: no photographs of the children on personal accounts, no household details in group chats, codes and keys handled as the valuables they are.
Then do your side of it: a family that gossips about its staff has no standing to preach discretion to them.
Insurance: For the Day Something Goes Wrong
The last piece of the legal house is the one families most often forget until the afternoon it matters. A household employee who is injured on your stairs, with your ladder, on your errand, is an injured employee — and workers' compensation is the system built for exactly that moment.
Whether you are required to carry it, and on what terms, is a question of your state's law, and the range is wide.
GTM Payroll's New Jersey household-employment guide, for example, records that household employers there must have workers' compensation coverage for all part-time and full-time employees — in some cases addable to a homeowner's policy — while other states set hour or payroll thresholds, and some make coverage voluntary but wise.
Layer onto it your umbrella liability policy, told honestly that you employ staff, and automobile coverage reviewed for employees driving your cars or theirs on your business. The premium is trivial. The uncovered accident is not.
That is the whole of it, and it is not much: classify honestly, register, withhold and match, file Schedule H, issue the W-2, write the agreement, respect the overtime, sign the NDA, carry the insurance. An afternoon of setup, a service on retainer, and a file that would make your accountant nod.
What you get in return is the only kind of luxury that compounds: a household that runs beautifully and can prove, on paper, that it treats the people who run it with the same excellence it demands from them. Done legally is not the unglamorous version of household employment.
It is the glamorous one — the kind great staff stay in for years.
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Internal Revenue Service — "Publication 926, Household Employer's Tax Guide"
Care.com — "Nanny Tax Guide: What Household Employers Must File"
LegalClarity — "Schedule H Requirements for Household Employers"
Poppins Payroll — "A Guide to a Perfect Nanny Contract"
MyStaffHQ — "What Is an NDA for Domestic Staff?"
GTM Payroll — "Nanny Taxes & Payroll Rules in New Jersey"
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