Household Employment: W-2 vs 1099 for Your Nanny
If you're hiring a nanny for the first time, you'll quickly run into the W-2 vs 1099 question. Every accountant, every payroll service, and every well-meaning friend will have an opinion. Here's the plain-English version of what you need to know.
Short answer: Almost every nanny should be paid as a W-2 employee, not a 1099 contractor.
Why This Matters
Getting this wrong is one of the most common (and expensive) mistakes household employers make. If the IRS decides you misclassified your nanny as a contractor when she should have been an employee, you can be on the hook for:
Back employment taxes (both employer and employee portions)
Penalties and interest
Potential state-level penalties from Washington ESD and L&I
Most families don't intentionally misclassify. They just don't know the rules.
The IRS Rule (Simplified)
The IRS looks at three factors to determine whether someone is an employee or a contractor:
1. Behavioral control
Do you direct WHEN and WHERE the work happens?
Do you set expectations for HOW the work is done?
For a nanny: yes and yes. You tell her when to arrive, where to be, and what your parenting style requires.
2. Financial control
Do you provide the tools and environment for the work?
Does the worker have opportunity for profit/loss based on how they run their own business?
For a nanny: You provide the home, kids, supplies, food. She's not running a "business" - she's showing up to your house.
3. Type of relationship
Is the work ongoing?
Is it central to your household operations?
For a nanny: Yes and yes. She's not a one-off contractor for a specific project.
Result: In almost every nanny situation, all three factors point to employee (W-2), not contractor (1099).
When 1099 Might Actually Apply
There are narrow exceptions:
Occasional babysitter who watches your kids a few times a year on date nights, isn't your regular caregiver, and is under $2,700/year in payments (2026 threshold): You may not owe household employment taxes at all.
True independent contractor situations: e.g., you hire a music teacher who gives your child a 30-min lesson each week in your home. She has other clients, sets her own rates, brings her own materials. She's a contractor.
If your nanny works 20+ hours a week, follows your schedule, and works only for your family (or maybe 1-2 families), she's an employee.
Why Families Try to 1099 Their Nannies Anyway
To be honest: because it's easier for the family.
With a 1099, you just hand over the money and issue a form at year-end. No withholding, no employer taxes, no quarterly filings.
But this "easier" can come at a cost:
It's usually illegal (the IRS's own guidance is clear on nanny classification)
It shifts the tax burden to the nanny unfairly - she pays BOTH sides of FICA (15.3% instead of 7.65%)
It disqualifies the nanny from unemployment insurance and workers' comp
If caught, YOU pay the back taxes, penalties, and interest
Not worth it.
What Being a W-2 Household Employer Actually Involves
Here's what you're responsible for:
One-time setup:
Get a Federal EIN (free, at irs.gov)
Register with Washington ESD (unemployment)
Register with Washington L&I (workers' comp, if hours exceed threshold)
Have your nanny complete a W-4 and I-9 on day 1
Every paycheck:
Withhold FICA (7.65% from nanny's gross wages)
Pay the employer FICA match (7.65% out of your pocket)
Pay Washington unemployment taxes
Pay Washington Paid Family Medical Leave premiums
(Optionally) withhold federal income tax if the nanny requested it
Every quarter:
File federal payroll tax returns
File Washington ESD returns
Annually:
Issue a W-2 to the nanny by January 31
Send copies to the Social Security Administration
Report household employment taxes on Schedule H of your personal 1040
Ongoing:
Comply with Washington Domestic Workers Bill of Rights
Provide legally required sick leave (1 hour per 40 worked)
Maintain workers' comp coverage if applicable
The Easy Way to Handle This
Most Spokane families use a household payroll service. For $50-75/month, these companies handle:
All federal and state tax filings
All withholdings
W-2 issuance
Direct deposit for the nanny
Compliance monitoring
The three we recommend:
HomeWork Solutions (homeworksolutions.com) — ~$65/month, full-service
GTM Payroll (gtm.com/household) — ~$75/month, great for families with multiple household staff
Poppins Payroll (poppinspayroll.com) — ~$49/month, more DIY-friendly
For most families, the peace of mind is worth 100x the monthly cost.
Tax Credits You Get Back
Being a legal household employer isn't just cost — it opens up tax benefits:
Child and Dependent Care Tax Credit: up to $3,000 per child ($6,000 for two or more) in qualifying childcare expenses
Dependent Care FSA (through your employer): up to $5,000/year in pre-tax dollars for childcare
Documenting nanny expenses lets you claim these credits: which usually offsets a big chunk of the employer taxes you pay
Talk to your CPA about which is better for your income and situation.
Common Questions
Q: What if we pay under the table?
A: This is a conversation to have with you and your nanny. However, factually this isn’t legal for a regular caregiver relationship. Under-the-table pay violates federal tax law, exposing you to significant penalties, and hurting your nanny (no unemployment, no Social Security credits, no W-2 for tax filing).
Q: What if our nanny wants to be a 1099?
A: A worker's preference doesn't change the legal classification. If she meets the IRS employee criteria, she's an employee.
Q: What if our nanny is a family member?
A: If she's your spouse, parent, or child under 21, different rules may apply. Talk to a tax pro.
Q: What if she only works 10 hours a week?
A: Household employment tax obligations kick in if you pay more than $2,700 in a calendar year (2026 threshold). 10 hours/week at $22/hour = $11,440/year. You're well over the threshold.
What to Do If You've Been Doing It Wrong
If you've been paying a nanny cash or as a 1099 and now realize you should have been running proper payroll, don't panic. It's fixable.
Steps to take:
Talk to a CPA who specializes in household employers
Get your nanny's W-4 and I-9 completed retroactively
Sign up with a household payroll service
File amended tax returns for prior periods (if needed)
Get compliant going forward
The sooner you fix it, the smaller the penalties.
Final Word
Being a household employer is more work than people expect. But it's part of hiring a nanny, and it protects both of you.
The good news: with a payroll service, it's genuinely manageable. Set it up once, then forget about it.
If you're considering hiring a nanny in the Spokane or Coeur d'Alene area, we cover payroll and tax setup in our Family Welcome Packet, which every family gets after their Discovery Call.
This blog post is not tax or legal advice. Please consult a qualified CPA or attorney for advice specific to your situation.
