IRS Schedule H: Household Employment Taxes (The Nanny Tax)

Schedule H is the IRS form for household employment taxes; commonly known as the "nanny tax." If you pay a housekeeper, nanny, gardener, personal caretaker, or any other household worker more than the annual threshold ($2,700 in 2024), you are their employer and owe Social Security, Medicare, and potentially federal unemployment taxes on their wages. Despite affecting millions of households, Schedule H has one of the highest non-compliance rates in the entire tax system; estimated at over 90%.

History and Origin

Household employment taxes have been required since the Social Security Act of 1935 extended coverage to domestic workers. However, the obligation was widely ignored for decades, operating in a gray area where both employers and workers tacitly agreed to keep arrangements informal and off the books.

The issue exploded into public consciousness during the 1993 "Nannygate" scandals. President Clinton's first nominee for Attorney General, Zoe Baird, was forced to withdraw after it was revealed she hadn't paid Social Security taxes for her household employees. A second leading candidate, Kimba Wood, also withdrew from consideration; though in her case she had actually paid all required taxes; her issue involved employing an undocumented immigrant when doing so was still legal. The scandals prompted Congress to simplify household employment tax reporting, leading to the creation of Schedule H; a single form attached to the employer's personal tax return rather than requiring separate employer identification numbers and quarterly payroll filings.

The Social Security Domestic Employment Reform Act of 1994 raised the reporting threshold from $50 per quarter to $1,000 per year (adjusted for inflation over time to the current $2,700), switched from quarterly to annual reporting, and created Schedule H as the dedicated form. The intent was to make compliance easier and boost reporting rates.

Despite these simplifications, non-compliance remains endemic. The informal nature of many household employment arrangements, the relatively small amounts involved, and the perceived complexity of becoming an "employer" all contribute to widespread non-compliance. The IRS has limited enforcement resources for individual household employers, and workers themselves often prefer cash payments to avoid their own tax obligations.

Who Files It and When

You must file Schedule H if you paid any single household employee $2,700 or more in cash wages during the 2024 tax year. The threshold applies per employee, not in total, if you paid two workers $2,000 each, neither triggers the requirement.

A "household employee" is someone who performs work in or around your home and whose work you control. Key examples include:

• Nannies and babysitters (regular, not occasional teenage sitters)
• Housekeepers and maids
• Private nurses and home health aides
• Gardeners and yard workers (if you provide tools and direct the work)
• Private chefs and cooks
• Drivers and chauffeurs
• Elder care workers and personal caretakers

Workers who are not household employees include independent contractors (workers who control how the work is done, like a self-employed house cleaning service), workers under age 18 (unless household work is their principal occupation), and your spouse, children under 21, or parents (with exceptions for parents only if certain conditions are met).

Schedule H is filed with your Form 1040 by April 15. If you have no other reason to file a tax return but owe household employment taxes, you must still file Form 1040 with Schedule H attached. You may also need to obtain an Employer Identification Number (EIN) and provide your employee with a W-2 by January 31.

Key Sections Explained

Part I; Social Security, Medicare, and Additional Medicare Taxes (Lines 1-8)

The core taxes calculated in Part I:

• Social Security tax: 12.4% total (6.2% employer + 6.2% employee) on wages up to $168,600 (2024 wage base)
• Medicare tax: 2.9% total (1.45% employer + 1.45% employee) on all wages with no cap
• Additional Medicare tax: 0.9% employee-only tax on wages exceeding $200,000

The employer and employee each owe their share. You can either withhold the employee's portion from their wages or pay both shares yourself (which makes the employer's share a taxable benefit to the employee).

Part II; Federal Unemployment Tax (FUTA) (Lines 9-15)

You owe FUTA tax if you paid household employees total cash wages of $1,000 or more in any calendar quarter. The FUTA rate is 6.0% on the first $7,000 of each employee's wages, but you receive a credit of up to 5.4% for state unemployment taxes paid; making the effective federal rate 0.6% (or $42 per employee maximum).

Part III; Total Household Employment Taxes

This section combines the Social Security, Medicare, and FUTA taxes into a total that flows to your Form 1040. This amount is added to your income tax and can be offset by estimated tax payments you made during the year.

Part IV; Address and Signature

Provides EIN information for household employers. If you don't have an EIN, you can apply for one on the IRS website; it's issued immediately for online applications.

Common Mistakes

• Not filing at all; The most common "mistake" is intentional non-compliance. Many employers don't realize they're legally required to pay employment taxes, or they choose to ignore the obligation. This can backfire during background checks, political vetting, custody disputes, or if the worker files for unemployment or disability benefits.
• Misclassifying employees as independent contractors; Calling your nanny a "contractor" doesn't make it so. The IRS looks at the degree of control, if you set the schedule, provide instructions, and the work is performed in your home, the worker is almost certainly an employee.
• Not providing a W-2; Household employers must issue Form W-2 to each employee and file copies with the Social Security Administration. Many household employers skip this step entirely.
• Not registering for state unemployment; Most states require household employers to register and pay state unemployment insurance. Requirements vary by state and may have different thresholds than the federal rules.
• Ignoring the Dependent Care FSA connection; If you use a Dependent Care FSA or claim the Child and Dependent Care Credit, the IRS can cross-reference whether you filed Schedule H for the caregiver. Claiming the credit without reporting the employment creates an inconsistency.
• Not withholding the employee's share; While you can pay the employee's share out of pocket, this is treated as additional wages to the employee. Most advisors recommend withholding from each paycheck.

Recent Changes

• Threshold adjustments; The cash wage threshold for Social Security and Medicare taxes is adjusted annually for inflation. It has risen from $1,000 (when Schedule H was created) to $2,700 in 2024. The FUTA threshold has remained at $1,000 per quarter for years.
• Nanny payroll services; The emergence of specialized payroll services (HomePay, GTM Payroll, Poppins Payroll) has made compliance dramatically easier. These services handle tax calculations, withholding, filings, W-2 preparation, and state registrations for monthly fees typically ranging from $50-$100.
• COVID-era provisions (expired) — During 2020-2021, household employers were eligible for sick leave and family leave credits related to COVID-19. These provisions have expired but may still affect amended returns for those tax years.
• State paid leave mandates — An increasing number of states (including California, New York, Massachusetts, and Washington) have enacted paid family and medical leave programs that apply to household employees. These create additional registration and contribution requirements for household employers.
• Remote work implications — The rise of remote work has created edge cases around household employment — such as whether a personal assistant who works from their own home but serves a household is a household employee. The determination still hinges on the degree of employer control and the nature of the work.

This article is educational and does not constitute tax advice. Consult a qualified tax professional for guidance specific to your situation.