Managing Your Nanny: Contracts, Taxes & Best Practices

Hiring a nanny is just the beginning. To build a successful, lasting relationship that works for everyone—your nanny, your children, and your family—you need to manage the employment professionally. That means getting the legal stuff right, communicating clearly, and treating your nanny with the respect any employee deserves.

This comprehensive guide covers everything you need to know about managing your nanny, from setting up payroll and creating a work agreement to building a positive working relationship and handling the inevitable challenges along the way.

The Legal Side: What Every Nanny Employer Must Know

You Are an Employer

When you hire a nanny, you become a household employer. This carries legal obligations:

Key facts:

• Your nanny is an employee, not an independent contractor
• You must pay employment taxes (no 1099 arrangement)
• You must follow federal and state labor laws
• You may need workers' compensation insurance
• Failure to comply can result in penalties and back taxes

The IRS is clear: Anyone working in your home, following your direction, using your supplies, is an employee. You cannot avoid employer obligations by calling them a contractor.

Employment Taxes Explained

What you must withhold and pay:

| Tax | Who Pays | Rate | Notes | |-----|----------|------|-------| | Social Security | Employee & employer each | 6.2% | On wages up to $160,200 (2023) | | Medicare | Employee & employer each | 1.45% | No wage cap | | Federal income tax | Employee | Varies | Optional to withhold, but recommended | | State income tax | Employee | Varies | Most states require | | FUTA (federal unemployment) | Employer | 0.6% | On first $7,000 of wages | | State unemployment | Employer | Varies | Usually 1-5% on first $10K-$50K |

Example calculation (annual):

| Item | Amount | |------|--------| | Nanny's gross salary | $50,000 | | Employer Social Security (6.2%) | $3,100 | | Employer Medicare (1.45%) | $725 | | FUTA (~0.6%) | $42 | | State unemployment (~2.5%) | $250 | | Total employer tax cost | ~$4,117 |

Your employer tax adds approximately 8-10% to your nanny's gross salary.

How to Pay Your Nanny

Option 1: Use a payroll service (recommended)

Services like HomePay, GTM Payroll, SurePayroll, or Poppins:

• Calculate withholdings automatically
• File payroll taxes on your behalf
• Handle end-of-year W-2 preparation
• Keep you compliant with changing laws
• Cost: $50-$100 per month

Option 2: Handle it yourself

If you're tax-savvy:

• Register as household employer with IRS (get EIN)
• Register with your state
• Calculate and withhold correct amounts each pay period
• Deposit taxes on schedule
• File quarterly returns
• Issue W-2 by January 31

Recommendation: Unless you're experienced with payroll, use a service. The peace of mind and time saved are worth the cost.

Workers' Compensation Insurance

Required in most states. Workers' comp covers:

• Medical expenses if nanny is injured on the job
• Lost wages during recovery
• Protection from lawsuits

How to get it:

• Add to your homeowners policy
• Purchase standalone household workers' comp policy
• Cost: $200-$500 per year typically

Don't skip this. If your nanny falls while carrying your child and can't work, you could be liable for medical bills and lost wages—potentially tens of thousands of dollars.

Overtime and Labor Laws

Federal overtime law (FLSA):

• Nannies who live out must receive overtime (1.5× rate) for hours over 40/week
• Live-in nannies may be exempt in some states

State laws may be stricter:

• Some states require overtime after 8 hours in a day
• Some provide additional protections (meal breaks, rest periods)
• California, New York, and other states have specific domestic worker laws

Minimum wage applies:

• Federal minimum: $7.25/hour
• Many states and cities have higher minimums
• You must pay at least the highest applicable minimum

The Nanny Work Agreement

A written work agreement protects everyone by clarifying expectations. It's not just a contract—it's a communication tool.

What to Include

1. Position Details

• Start date
• Work schedule (days, hours, flexibility expected)
• Primary responsibilities
• Additional duties (if any)
• Location of work

2. Compensation

• Hourly rate or weekly/annual salary
• Pay schedule (weekly, bi-weekly)
• Payment method (direct deposit, check)
• Overtime policy and rate

3. Benefits

| Benefit | Common Offerings | |---------|-----------------| | Paid time off (vacation) | 1-2 weeks (accrued or frontloaded) | | Sick days | 3-5 days paid | | Holidays | 6-10 major holidays paid | | Health insurance | Stipend ($200-$500/month) or plan participation | | Other | Transit, cell phone, gym, professional development |

4. Policies

• Sick policy (when to stay home, notification)
• Vacation scheduling (how much notice, approval)
• Overnight/travel expectations
• Visitors during work hours
• Phone/screen use
• Driving expectations (if applicable)
• Discipline philosophy
• Emergency procedures

5. House Rules

• Areas of the home accessible
• Food and kitchen use
• Parking
• Pet care expectations
• Screen time limits for children
• TV/music during work

6. Confidentiality

• Expectation of family privacy
• Social media policy (photos of children)
• Sharing family information

7. Termination

• Notice required (typically 2-4 weeks)
• Circumstances for immediate termination
• Final pay and paperwork

8. Review and Raises

• When performance reviews occur
• Raise expectations and timing
• Process for discussing concerns

Sample Agreement Structure

NANNY WORK AGREEMENT

This agreement is between [Family Name] and [Nanny Name],
effective [Start Date].

1. SCHEDULE AND DUTIES
   1.1 Work schedule: [Days] from [Start Time] to [End Time]
   1.2 Primary responsibilities: [List]
   1.3 Additional responsibilities: [List]

2. COMPENSATION
   2.1 Rate: $[X] per hour / $[X] weekly
   2.2 Pay schedule: [Weekly/Bi-weekly] on [Day]
   2.3 Overtime: Time and a half for hours over 40/week

3. BENEFITS
   3.1 Paid time off: [X] days vacation, [X] sick days
   3.2 Paid holidays: [List]
   3.3 Other benefits: [Health stipend, etc.]

4. POLICIES
   [Detailed policies]

5. CONFIDENTIALITY AND PRIVACY
   [Expectations around family privacy]

6. TERMINATION
   6.1 Notice period: [X] weeks
   6.2 Grounds for immediate termination: [List]

7. SIGNATURES
   [Family] Date: ______
   [Nanny] Date: ______

Building a Great Working Relationship

Clear Communication

Daily communication:

• Use a daily log (written or app-based)
• Report on eating, sleeping, activities, mood
• Note any concerns or questions
• Share highlights and milestones

Weekly check-ins:

• Brief conversation about how things are going
• Address any schedule changes for coming week
• Discuss any concerns early

Formal reviews:

• Schedule quarterly or biannual reviews
• Discuss what's working and areas for growth
• Review compensation and adjust if appropriate
• Document agreements

Setting Boundaries

Professional boundaries:

• Respect their time off (don't text at 10pm about tomorrow)
• Don't expect them to always be "flexible"
• Give advance notice for schedule changes
• Let them have a life outside your family

House boundaries:

• Be clear about what's off-limits
• Respect their privacy when they're in your home
• Don't micromanage every moment
• Trust them to do their job

Emotional boundaries:

• They are an employee, not a family member
• Appropriate warmth is fine; enmeshment isn't
• Keep work and personal relationships clear
• Handle conflicts professionally

Showing Appreciation

Daily/weekly:

• Say thank you genuinely and specifically
• Acknowledge extra effort
• Provide positive feedback, not just criticism
• Stock snacks/drinks they like

Periodic:

• Annual bonus (typically 1-2 weeks' pay)
• Holiday gifts
• Birthday recognition
• Gift cards or experiences

Ongoing:

• Fair pay raises
• Reasonable requests accommodated when possible
• Advocacy (be a reference, support career growth)
• Flexibility when they need it

"Our nanny stayed five years because we treated her like the professional she is. Bonuses, raises, flexibility when her mom was sick. It goes both ways." — Parent from Seattle

Handling Common Challenges

Lateness or Reliability Issues

If it happens occasionally:

• Address it casually: "Everything okay? I noticed you were late a couple times this week."
• Give benefit of the doubt initially

If it becomes a pattern:

• Discuss in a formal conversation
• Reference the work agreement
• Be clear about expectations
• Document the conversation
• Set specific improvement expectations

Performance Concerns

Address early and directly:

• "I've noticed [specific observation]. Can we talk about it?"
• Be specific, not vague
• Listen to their perspective
• Agree on expectations going forward
• Follow up

Document everything:

• Keep notes on conversations
• Save texts or emails about issues
• This protects you if termination becomes necessary

Disagreements About Care

When you disagree on parenting approach:

• Start with curiosity: "Tell me more about why you do it that way."
• Explain your preferences clearly: "In our family, we prefer to..."
• Be open to learning—they may have valid expertise
• On fundamental issues, your preferences prevail (you're the parent)

When Things Aren't Working

Signs it may be time to part ways:

• Repeated reliability problems despite conversations
• Fundamental incompatibility in values or approach
• Your children aren't thriving
• Trust has broken down
• You dread coming home

How to end the relationship:

• Give required notice (per agreement, usually 2-4 weeks)
• Be direct but kind: "This isn't working for our family"
• You don't need to over-explain
• Pay through end of notice period
• Provide final paycheck including any owed PTO
• Offer to be a reference (if honest)

Managing Schedule Changes and Time Off

Nanny's Time Off

Planned time off:

• Require advance notice (per agreement—typically 2-4 weeks)
• You may need to approve specific dates
• Arrange backup care for their vacation
• Pay for their PTO days

Sick days:

• Require notification as early as possible
• Have backup care options ready
• Pay for sick days per agreement
• Don't pressure them to come in sick

When your schedule changes:

• Give as much notice as possible
• If you don't need them (your vacation, WFH day), still pay them
• Guaranteed hours protect your nanny and your relationship

Backup Care

Build backup options before you need them:

• Family members willing to help
• Friends with flexible schedules
• Backup babysitter you've used before
• Backup care service (Care.com, UrbanSitter)
• Daycare with drop-in slots

Don't expect your nanny to find their own replacement when they're sick.

The Financial Picture

Total Cost of Employment

Annual costs beyond salary:

| Item | Estimated Cost | |------|----------------| | Employer taxes | 8-10% of gross salary | | Workers' comp insurance | $200-$500 | | Payroll service | $600-$1,200 | | Health insurance stipend | $0-$6,000 | | Annual bonus | 2-4% of salary | | Paid time off (value) | 4-6% of salary | | Total additional cost | 15-25%+ of base salary |

If you budget $50,000 for a nanny, plan to spend $57,000-$62,000+ total.

Tax Benefits for You

Dependent Care FSA:

• Save up to $5,000 pre-tax for child care
• Reduces your taxable income
• If in 24% bracket, saves ~$1,200 in taxes

Child and Dependent Care Credit:

• Cannot use BOTH FSA maximum AND full credit
• Credit is 20-35% of expenses up to $3,000/$6,000
• Calculate which benefits you more

Frequently Asked Questions

Q: Can I pay my nanny "under the table" to avoid taxes?

A: No. It's illegal, and both you and your nanny can face consequences including back taxes, penalties, and legal liability. It also hurts your nanny (no Social Security credits, no unemployment if laid off) and you (no child care tax breaks).

Q: Should I give my nanny a key to my house?

A: Typically yes, for flexibility. Change locks when the employment ends. Some families use smart locks with codes that can be easily changed.

Q: What if my nanny and I disagree on discipline?

A: You set the rules. Be clear in your agreement about discipline philosophy (no spanking, time-out procedures, etc.). Have an early conversation to ensure alignment. If you fundamentally disagree, it may not be the right fit.

Q: How do I handle a nanny who overshares about her personal life?

A: Redirect gently: "I hear you're going through a lot. During work hours, let's focus on [Child]—but feel free to talk to me after." You can be warm without becoming your nanny's therapist.

Q: When and how much should I raise my nanny's pay?

A: Annually is standard. Raises of 3-5% are typical for cost of living; more for expanded responsibilities or excellent performance. Discuss in a formal review setting.

Conclusion

Managing a nanny well requires treating the relationship as what it is: a professional employment relationship with personal elements. Get the legal basics right (taxes, workers' comp, written agreement), communicate clearly and often, set boundaries while showing appreciation, and address problems early.

The families who keep excellent nannies for years share common practices:

• Pay fairly and on the books
• Respect boundaries and time off
• Communicate openly and address issues promptly
• Show genuine appreciation
• Treat their nanny as a professional partner

Do these things, and you'll build a relationship that benefits your children most of all.

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Need more guidance on nanny care? Check out our guides on how to hire a nanny, nanny costs, nanny vs. daycare, and au pair vs. nanny.