Thinking about hiring a nanny? The hourly rate you agree on is just the beginning. To do things legally—and you should—expect to add 9-12% on top of their wages for employer taxes, plus optional payroll service fees.
Is it worth it? Absolutely. Here's the complete cost breakdown so you know exactly what you're getting into.
The True Cost Formula
Total annual cost = Wages + Employer taxes + Payroll service (optional)
Your employer taxes include:
- Social Security: 6.2% of wages (your half)
- Medicare: 1.45% of wages (your half)
- Federal Unemployment (FUTA): 0.6% on first $7,000
- State Unemployment (SUTA): 1-5% depending on state
Let's see exactly what this looks like with real numbers.
Real Example: $20/Hour Full-Time Nanny
You hire a nanny at $20/hour for 40 hours per week, 52 weeks per year.
Gross Wages
$20/hour × 40 hours × 52 weeks = $41,600/year
Your Employer Taxes
| Tax | Rate | Amount |
|---|---|---|
| Social Security | 6.2% | $2,579 |
| Medicare | 1.45% | $603 |
| FUTA | 0.6% on $7,000 | $42 |
| SUTA (average) | 2.5% on ~$7,000 | $175 |
| Total employer taxes | ~7.9% | $3,399 |
Payroll Service (Optional)
| Service Level | Monthly | Annual |
|---|---|---|
| Basic (NannyKeeper Starter) | $10 | $120 |
| Full-service (NannyKeeper Plus) | $18 | $216 |
| Premium (some competitors) | $50-$75 | $600-$900+ |
Total Annual Cost
| Category | Basic Service | Full Service | DIY |
|---|---|---|---|
| Wages | $41,600 | $41,600 | $41,600 |
| Employer taxes | $3,399 | $3,399 | $3,399 |
| Payroll service | $120 | $216 | $0 |
| Total | $45,119 | $45,215 | $44,999 |
Effective hourly rate: $21.63-$21.74 (including employer taxes and service)
That's about 8.2% above the base wage just for taxes, plus your payroll service costs.
Breaking Down Each Tax
Understanding what you're paying for helps it feel less like throwing money away.
Social Security (6.2%)
This funds your nanny's retirement benefits. They pay 6.2% from their wages; you match it with another 6.2%. Total: 12.4% goes to Social Security.
For a nanny earning $41,600:
- Employee pays: $2,579 (withheld from their check)
- You pay: $2,579 (your employer portion)
- Total to Social Security: $5,158
Why it matters: Every dollar you pay legally counts toward your nanny's Social Security benefits. Many nannies are shocked to discover they have almost no Social Security credits because past employers paid them under the table.
Medicare (1.45%)
Same structure as Social Security. You each pay 1.45%, totaling 2.9%.
For a nanny earning $41,600:
- Employee pays: $603 (withheld)
- You pay: $603 (your portion)
- Total to Medicare: $1,206
Federal Unemployment - FUTA (0.6%)
FUTA funds federal unemployment insurance. You pay this entirely—it's not withheld from your nanny's pay.
The nominal rate is 6.0%, but you get a 5.4% credit for paying state unemployment taxes, bringing the effective rate to 0.6%.
- FUTA wage base: $7,000
- Effective rate: 0.6%
- Maximum FUTA: $42 per employee
This one's a bargain—$42 for an entire year of federal unemployment insurance.
State Unemployment - SUTA
State unemployment taxes vary significantly. You'll register with your state's unemployment insurance program and receive an assigned rate based on your industry and experience.
| State | Typical New Employer Rate | Wage Base |
|---|---|---|
| California | 3.4% | $7,000 |
| New York | 2.5% | $12,500 |
| Texas | 2.7% | $9,000 |
| Florida | 2.7% | $7,000 |
| Illinois | 3.45% | $13,590 |
| Washington | 1.16% | Variable |
| New Jersey | 2.8% | $42,300 |
| Pennsylvania | 3.69% | $10,000 |
Example for California:
- Wage base: $7,000
- New employer rate: 3.4%
- Annual SUTA: $238
Your rate may decrease over time if you don't have unemployment claims.
State-by-State Cost Comparison
For a nanny earning $40,000/year, here's how employer costs vary by state:
| State | FICA (7.65%) | FUTA | SUTA | Total Employer Tax | % of Wages |
|---|---|---|---|---|---|
| California | $3,060 | $42 | $238 | $3,340 | 8.4% |
| New York | $3,060 | $42 | $313 | $3,415 | 8.5% |
| Texas | $3,060 | $42 | $243 | $3,345 | 8.4% |
| Florida | $3,060 | $42 | $189 | $3,291 | 8.2% |
| New Jersey | $3,060 | $42 | $1,184 | $4,286 | 10.7% |
| Illinois | $3,060 | $42 | $469 | $3,571 | 8.9% |
| Washington | $3,060 | $42 | $81 | $3,183 | 8.0% |
Key insight: Most states cluster around 8-9% in employer taxes. New Jersey is notably higher due to its large wage base.
Compare nanny costs across all 50 states →
Check your state's specific requirements →
What About Payroll Services?
You have several options for handling payroll:
Option 1: DIY (Free but Time-Consuming)
Handle everything yourself:
- Apply for an EIN (free, 5 minutes)
- Register with your state unemployment agency
- Calculate taxes each pay period
- Withhold and track employee taxes
- Make quarterly payments to IRS and state
- Generate W-2 and file Schedule H in January
Cost: $0 Time: 2-4 hours initially, then 30-60 minutes per month Best for: Financially savvy families who want maximum control
Option 2: Budget Services ($10-$18/month)
Services like NannyKeeper handle:
- Tax calculations for every paycheck
- Pay stub generation
- Quarterly tax reminders and calculations
- Year-end W-2 and Schedule H preparation
- Direct deposit (on Plus plan)
Cost: $120-$216/year Time: Minutes per pay period Best for: Most families—good balance of cost and convenience
Option 3: Full-Service ($50-$75+/month)
Premium services handle:
- Everything above, plus
- They file taxes for you
- Phone support
- Sometimes HR guidance
Cost: $600-$1,000+/year (watch for year-end fees) Time: Almost none Best for: Families who want completely hands-off payroll
Which Should You Choose?
| Your Situation | Recommendation |
|---|---|
| Comfortable with numbers, want to save money | DIY or budget service |
| Want help but budget-conscious | Budget service (NannyKeeper) |
| Want hands-off, price isn't primary concern | Full-service |
| Multiple employees, complex situation | Full-service or accountant |
The Cost of NOT Doing It Legally
Let's talk about the elephant in the room. Some families pay under the table to avoid these costs. Here's what happens when that goes wrong.
How People Get Caught
Common triggers for discovery:
- Your nanny files for unemployment - The state investigates and finds no employment record
- Your nanny applies for Social Security - They realize they have no credits
- Divorce proceedings - Financial audits uncover unreported payments
- IRS audit - Random or triggered by other issues
- Your nanny reports you - Happens more often than you'd think, especially after disputes
What You'll Owe
If the IRS discovers you've been paying under the table:
| Penalty | Amount |
|---|---|
| Back taxes (typically 3 years) | $9,000-$12,000 |
| Failure-to-file penalty (up to 25%) | $2,250-$3,000 |
| Failure-to-pay penalty (up to 25%) | $2,250-$3,000 |
| Interest (~7% annually, compounding) | $2,000+ |
| Potential total | $15,000-$20,000+ |
And that's just federal. States can pile on their own penalties for unpaid unemployment insurance.
What Your Nanny Loses
When you pay under the table, your nanny loses:
- Social Security credits - Affects their retirement benefits
- Medicare credits - Affects their healthcare in retirement
- Unemployment eligibility - If you let them go, they can't file for benefits
- Income documentation - Harder to get loans, apartments, mortgages
- Workers' compensation protection - If they're injured on the job
Many experienced nannies now insist on legal payment because they've learned these lessons the hard way.
The Math: Is It Worth Paying Under the Table?
Let's say you "save" $3,500/year by not paying employer taxes.
Over 5 years, you've "saved" $17,500.
Then your nanny files for unemployment, and the state investigates.
Your potential cost:
- Back taxes (5 years): $17,500
- Penalties (25%): $4,375
- Interest: $3,000+
- Total owed: $25,000+
You didn't save anything. You created a $7,500+ liability—plus the stress of dealing with the IRS.
Tax Benefits That Offset Costs
The good news: there are legitimate tax benefits that can reduce your net cost of hiring a nanny legally.
Dependent Care FSA
If your employer offers one, you can contribute up to $5,000 pre-tax for childcare expenses.
For a family in the 24% federal bracket:
- $5,000 contribution
- Federal savings: $1,200
- FICA savings: $383
- State savings (5%): $250
- Total savings: ~$1,833
Child and Dependent Care Credit
If you don't have FSA access, you can claim a credit of 20-35% on up to $3,000-$6,000 of childcare expenses.
- One child: Up to $1,050 credit
- Two+ children: Up to $2,100 credit
Net Cost After Tax Benefits
For a family paying $41,600/year in nanny wages:
| Item | Amount |
|---|---|
| Wages | $41,600 |
| Employer taxes | $3,399 |
| Payroll service | $120 |
| Gross cost | $45,119 |
| Less: FSA tax savings | ($1,833) |
| Net cost | $43,286 |
The tax benefit covers more than half your employer taxes.
Learn more about childcare tax benefits →
Strategies to Manage Costs
1. Budget for the True Cost From the Start
When comparing nanny costs to daycare, remember to add 9-12% for taxes. A $20/hour nanny actually costs $21.50-$22/hour.
Make sure you're paying at least your state's minimum. See nanny minimum wage by state →
2. Use Tax-Advantaged Accounts
Max out your Dependent Care FSA ($5,000) before paying out-of-pocket. The tax savings are immediate and substantial.
3. Consider a Nanny Share
Two families sharing a nanny split the cost. Each family still pays their own taxes, but wages per family are lower—potentially keeping you under the threshold or at least reducing your base.
4. Increase Your W-4 Withholding
Instead of making quarterly estimated payments, bump up your own W-4 withholding at work. The extra withholding covers your household employment taxes, and you avoid the hassle of quarterly payments.
5. Get Competitive Quotes
Payroll service pricing varies wildly. Get quotes from 2-3 services before committing. Watch for hidden fees, especially year-end charges.
Side-by-Side: Legal vs. Under the Table
| Factor | Legal | Under the Table |
|---|---|---|
| Hourly cost (including taxes) | ~$22/hr | ~$20/hr |
| Annual cost (for $40k wages) | ~$45,000 | ~$41,600 |
| Peace of mind | Yes | No |
| Risk of IRS audit | Low | Present |
| Audit cost if caught | $0 | $15,000+ |
| Nanny gets Social Security | Yes | No |
| Nanny can get unemployment | Yes | No |
| You can claim tax credits | Yes | No |
| Nanny can get mortgage/loans easily | Yes | Harder |
The bottom line: You "save" $3,400/year going under the table. If caught even once in a decade, that $34,000 in "savings" turns into a $20,000+ loss—plus legal headaches.
Legal vs. Under-the-Table
Paying Legally
- Your nanny builds Social Security credits
- They can claim unemployment if needed
- You can claim tax credits (up to $6,000 back)
- No risk of IRS penalties or back taxes
- Professional relationship with clear records
Paying Cash
- Your nanny gets no Social Security credit
- No unemployment benefits if they're let go
- You can't claim childcare tax credits
- Risk of IRS audit, penalties, and back taxes
- Can damage your relationship if discovered
Frequently Asked Questions
Is it cheaper to use a nanny agency? Agencies charge placement fees (often 10-15% of annual salary) but typically don't handle payroll. The tax costs are the same—you're still the employer. Some agencies partner with payroll services and can bundle, but you should compare costs.
Can I classify my nanny as an independent contractor? No. The IRS is crystal clear that household workers who work in your home, under your direction, are employees—not contractors. Misclassifying results in back taxes, penalties, and potential fraud charges.
What if my nanny only works part-time? The same employer taxes apply, just calculated on lower wages. If you pay under $3,000/year (2026 threshold), you don't owe employment taxes at all.
Do I need workers' compensation insurance? Many states require it for household employees. Cost is typically $200-$500/year, or you can add a rider to your homeowner's insurance for less. Check your state's requirements.
What if I'm paying more than one household employee? You'll pay FUTA and SUTA for each employee (capped at the wage base per employee). FICA percentages apply to all wages. Your payroll complexity increases, but a good service handles it easily.
Can I deduct nanny wages as a business expense? Only if you're self-employed and need childcare specifically to work. This is the home office deduction territory—consult a tax professional. For most W-2 employees, the answer is no.
The Bottom Line
Hiring a nanny legally costs about $3,000-$4,000 extra per year compared to paying under the table. That's $250-$350/month.
What you get for that money:
- Legal protection for you and your nanny
- Tax credits that offset some of the cost
- Complete peace of mind
- Your nanny gets Social Security and unemployment benefits
- No audit risk lurking in your future
For most families, the answer is clear: pay legally. The cost of compliance is far less than the cost of getting caught.
Ready to see your exact numbers? Try our calculator →