Complete Payroll Setup Guide for Household Employers

Introduction

Setting up household payroll correctly from day one protects you from costly penalties and ensures your employee receives proper benefits like Social Security credits and unemployment protection. This comprehensive guide walks you through every step of establishing compliant payroll for your nanny, caregiver, or other household employee.

Before You Begin: Understanding Your Status

Who Qualifies as a Household Employer?

You're a household employer if you hire someone to work in or around your home and:

• Pay them $2,700 or more in cash wages per year (2024 threshold)
• Control what work they do and how they do it
• Employ them on a regular, ongoing basis

Common household employees include nannies, senior caregivers, housekeepers, private nurses, and personal assistants.

Employee vs. Independent Contractor

This is critical: household workers are almost always employees, not contractors. The IRS uses a control test:

• Employee: You control their schedule, provide equipment, and direct how they work
• Contractor: They set their own hours, use their own tools, and work independently

Misclassifying an employee as a contractor can result in back taxes, penalties, and interest.

Step 1: Obtain Your Employer Identification Number (EIN)

Your EIN is like a Social Security number for your business. You need it to file payroll taxes.

How to Get an EIN

1. Apply online: Visit the IRS EIN application (fastest method)
2. Apply by mail: Use Form SS-4
3. Apply by phone: Call the IRS Business & Specialty Tax Line at 1-800-829-4933

Cost: Free Processing time: Immediate online, 4 weeks by mail

Important: Keep your EIN confirmation letter in a safe place. You'll need it for state registration and tax filings.

Step 2: Verify Employee Eligibility (Form I-9)

Federal law requires you to verify that your employee is authorized to work in the United States.

Form I-9 Requirements

1. Employee completes Section 1 on or before their first day of work
2. You examine acceptable documents (passport, driver's license + Social Security card, etc.)
3. You complete Section 2 within 3 business days of their start date
4. Keep the completed I-9 for 3 years after hire or 1 year after termination, whichever is longer

Do NOT file the I-9 with any government agency. Keep it in your personal records.

Where to get Form I-9: USCIS I-9 Central

Step 3: Complete Form W-4 (Withholding Certificate)

Your employee must complete Form W-4 to determine federal income tax withholding.

Key W-4 Information

• Purpose: Tells you how much federal income tax to withhold from paychecks
• When: Before first paycheck
• Updates: Employee can submit a new W-4 anytime their situation changes (marriage, child, second job)

You do NOT file the W-4 with the IRS—keep it in your payroll records.

Note for household employers: Many household employees have zero federal income tax withholding due to low annual wages and standard deduction. However, you still must have a completed W-4 on file.

Step 4: Register with Your State

State requirements vary significantly. Most states require:

State Tax Department Registration

Register to report and pay state income tax withholding (if applicable). States without income tax (like Alaska, Florida, Texas, Washington) skip this step.

Typical requirements:

• Employer account number
• Quarterly wage reports
• State income tax withholding deposits

State Unemployment Insurance (SUI)

You must register for SUI if you pay $1,000 or more in cash wages in a calendar quarter. Registration gives you:

• State employer account number
• SUI tax rate (usually 0.5%-3% for new employers)
• Quarterly reporting requirements

Workers' Compensation Insurance

Some states require household employers to carry workers' comp. Others make it optional. Check your state's rules at:

• State workers' compensation board website
• State labor department

States requiring workers' comp for household employers: California, New York, New Jersey (if paying $1,000+ per year)

State-Specific New Hire Reporting

Most states require you to report new hires within 20 days of their start date. This helps track child support obligations and prevent improper unemployment claims.

How to report: Visit your state's New Hire Reporting website (usually run by the child support enforcement division).

Step 5: Set Up Your Payroll System

Choose how you'll run payroll:

Option 1: Manual Payroll

Pros: No monthly fees, complete control Cons: Time-consuming, error-prone, requires tax knowledge

Required tools:

• Payroll register (spreadsheet or ledger)
• Tax calculation tables (from IRS Circular E)
• State tax withholding tables
• Check stock or payment method

Option 2: Payroll Software (NannyLedger)

Pros: Automatic tax calculations, e-filing, direct deposit, compliance reminders Cons: Monthly subscription cost

What to look for:

• Household employer specialization (not general business payroll)
• All 50-state support
• Schedule H preparation (not quarterly 941s)
• Year-end W-2 generation
• Tax payment reminders

Option 3: Full-Service Payroll Provider

Pros: Handles everything including tax deposits and filings Cons: Most expensive option ($300-1,000+ per year)

Step 6: Establish a Payment Schedule

Determine how often you'll pay your employee:

Common Pay Frequencies

• Weekly: 52 paychecks per year
• Bi-weekly: 26 paychecks per year (every two weeks)
• Semi-monthly: 24 paychecks per year (1st and 15th)
• Monthly: 12 paychecks per year

Check state law: Some states mandate minimum pay frequency (e.g., weekly or bi-weekly for non-exempt employees).

Best practice: Bi-weekly is most common for household employees. It balances administrative burden with cash flow for employees.

Step 7: Understand Your Tax Obligations

As a household employer, you're responsible for several taxes:

Federal Taxes

Social Security and Medicare (FICA): 7.65% employer share + 7.65% employee share (15.3% total)

• Social Security: 6.2% each (on wages up to $168,600 in 2024)
• Medicare: 1.45% each (no wage limit)
• Additional Medicare: 0.9% employee-only on wages over $200,000

Federal Unemployment Tax (FUTA): 6.0% on first $7,000 of wages (reduced to 0.6% with state credits)

Federal Income Tax: Withheld based on employee's W-4 (may be $0 for many household employees)

State Taxes

State Income Tax Withholding: Based on employee's state withholding certificate (if applicable)

State Unemployment Insurance (SUI): Typically 0.5%-3% on first $7,000-$50,000 of wages (varies by state)

State Disability Insurance: Required in CA, HI, NJ, NY, RI, and PR

When Taxes Are Due

During the year: No quarterly deposits required (unlike business employers)

Annual filing: File Schedule H with your personal tax return (Form 1040) by April 15

Exception: If you owe $1,000+ in household employment taxes, you may need to make estimated tax payments quarterly.

Step 8: Maintain Required Records

Keep these records for at least 4 years:

Payroll Records

• Employee name, address, and Social Security number
• Dates of employment
• Dates and amounts of wage payments
• Tax withholding amounts
• Copy of employee's W-4

Tax Records

• EIN confirmation
• State registration confirmations
• Copies of filed tax returns (Schedule H, state returns)
• Payment confirmations for tax deposits
• W-2s and W-3s

Employment Records

• Form I-9 (3 years after hire or 1 year after termination)
• Employment agreement or offer letter
• Time records (if hourly employee)

Step 9: Year-End Responsibilities

Every January, you must:

1. Prepare W-2s: Create a W-2 for your employee showing annual wages and tax withholding
2. Distribute W-2s: Give Copy B and C to your employee by January 31
3. File W-2s with SSA: Submit Copy A to the Social Security Administration by January 31
4. Prepare W-3: Transmittal form for W-2s sent to SSA
5. File Schedule H: Include with your personal tax return (Form 1040)

NannyLedger tip: Our platform generates W-2s automatically and e-files them with the SSA.

Step 10: Plan for Ongoing Compliance

Household payroll isn't a one-time setup. Budget for:

Annual Costs

• State unemployment insurance: $50-500+
• Workers' compensation (if required): $200-1,000+
• Payroll software: $200-600
• Tax preparation assistance: $0-500 (if using professional)

Quarterly Tasks

• Review payroll registers
• Check for tax rate updates
• Verify state account status

Annual Tasks

• Issue W-2s
• File Schedule H
• Renew workers' compensation policy (if applicable)
• Update employee W-4 if needed

Common Mistakes to Avoid

1. Paying cash under the table: Exposes you to penalties and denies your employee earned benefits
2. Misclassifying as a contractor: IRS presumes household workers are employees
3. Missing state registration: Each state has unique requirements
4. Not withholding Social Security/Medicare: Always required if you pay $2,700+ per year
5. Forgetting Schedule H: Due with your personal tax return, not separately
6. Using business payroll forms: Household employers use Schedule H, not Form 941

Resources

• IRS Publication 926 (Household Employer's Tax Guide)
• IRS Schedule H Instructions
• SSA Form W-2 Filing
• USCIS I-9 Central
• State Labor Departments (DOL Directory)

Next Steps

Ready to simplify your household payroll? NannyLedger automates tax calculations, e-files W-2s, and sends compliance reminders so you never miss a deadline.

Start Now →

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Disclaimer: This guide provides general information only and does not constitute legal or tax advice. Consult a tax professional for guidance specific to your situation.