How to Set Up Nanny Payroll: Step-by-Step Guide

Setting up nanny payroll feels overwhelming the first time. Between employer IDs, tax withholding calculations, state registrations, and filing deadlines, it is easy to put it off. But running proper payroll is a legal requirement once you pay a household employee above the IRS threshold, and the penalties for noncompliance far exceed the effort of getting it right from the start.

This guide walks you through every step of setting up nanny payroll, from obtaining your EIN to choosing a payroll method and running your first pay cycle. For the full picture on your tax obligations, see our complete nanny tax guide.

Step 1: Apply for a Federal EIN

Your Employer Identification Number (EIN) is the tax ID you use for all household employment filings. It is separate from your personal Social Security number. Apply online at IRS.gov — the process takes about 10 minutes and you receive your EIN immediately.

When completing the application, select "Household Employer" as the entity type. This tells the IRS you are hiring domestic workers, not running a business. Store your EIN securely — you will need it for every tax filing, state registration, and W-2 you issue.

Step 2: Register with Your State

Most states require separate registration for household employers. This typically involves:

• State unemployment insurance: Register with your state's labor or employment department. You will receive a state employer account number and your initial SUTA tax rate.
• State income tax withholding: If your state has an income tax, register for a withholding account with the state tax agency.
• Additional programs: Some states require registration for disability insurance (CA, NJ, NY, RI, HI), paid family leave (CA, NJ, NY, MA, WA, CT, OR, CO, MD, DC, MN), or other programs.

Registration deadlines vary. California requires registration with the EDD within 20 days of paying $750 or more in a quarter. New York requires registration within 10 days of hiring. Check your state's specific deadline to avoid late registration penalties.

Step 3: Collect Employee Paperwork

Before running your first payroll, collect these forms from your nanny:

1. Form I-9 (Employment Eligibility Verification) — Must be completed on or before the first day of work. Examine original identity and work authorization documents.
2. Form W-4 (Employee's Withholding Certificate) — Determines federal income tax withholding. If your nanny does not submit a W-4, you are not required to withhold federal income tax, but your nanny may face a large tax bill in April.
3. State W-4 equivalent — Many states have their own withholding forms (e.g., California DE 4, New York IT-2104).
4. Direct deposit authorization — If you plan to pay via direct deposit, collect your nanny's bank routing and account numbers.

Step 4: Choose Your Payroll Method

You have three main options for processing nanny payroll. Here is how they compare:

For most families, a dedicated nanny payroll service offers the best balance of cost, convenience, and accuracy. Poppins Payroll costs $49 per month and is built specifically for household employers — from Schedule H filings to state-specific nanny tax rules. Beverly members who are new Poppins clients get a full year of Poppins Payroll included in their membership.

Step 5: Calculate Withholding and Employer Taxes

For each pay period, you need to calculate and track these amounts:

Employee Withholding (Deducted from Paycheck)

• Social Security: 6.2% of gross wages (up to $184,500 wage base)
• Medicare: 1.45% of gross wages (no cap)
• Federal income tax: Based on W-4 (optional if nanny does not request it)
• State income tax: Based on state W-4 and state tax tables
• State disability/paid leave: Where applicable (e.g., CA SDI at 1.3%)

Employer Taxes (Paid by You)

• Social Security: 6.2% (employer match)
• Medicare: 1.45% (employer match)
• FUTA: 0.6% on first $7,000 (after state credit)
• SUTA: State-specific rate on state-defined wage base

The total employer cost above gross wages is approximately 9% to 12%, depending on your state. Factor this into your overall nanny budget from the beginning.

Step 6: Run Your First Payroll

With everything set up, running payroll each period follows a consistent process:

1. Track hours worked. Maintain a timesheet or use a time-tracking app. Record start time, end time, and any breaks. Flag any overtime hours.
2. Calculate gross pay. Multiply regular hours by the hourly rate. Add overtime hours at 1.5x the regular rate.
3. Apply withholding. Deduct employee FICA, federal income tax, and state taxes from gross pay.
4. Determine net pay. Gross pay minus all deductions equals the amount you pay your nanny.
5. Issue payment and pay stub. Pay your nanny via direct deposit or check. Provide a pay stub showing gross pay, each deduction, and net pay.
6. Record employer taxes owed. Note your matching FICA, FUTA, and SUTA obligations. These accumulate until your quarterly payment is due.

Step 7: Set Up Quarterly Tax Payments

Unlike a business that files quarterly payroll returns (Form 941), household employers report annual taxes on Schedule H with their personal tax return. However, you still need to pay taxes throughout the year to avoid underpayment penalties. You can either:

• Make quarterly estimated payments using IRS Form 1040-ES
• Increase withholding on your own W-4 at your workplace to cover the additional liability

State quarterly unemployment filings are separate and must be submitted on the schedule your state requires — typically quarterly, with deadlines roughly one month after each quarter ends.

Common Payroll Mistakes to Avoid

1. Paying cash with no records. Even if you calculate taxes correctly, you need a paper trail. Pay stubs, bank records, and tax deposits protect you in an audit.
2. Forgetting state registrations. Federal setup alone is not sufficient. Missing state unemployment or disability registration can trigger penalties and leave your nanny without unemployment eligibility.
3. Using 1099 instead of W-2. Your nanny is a household employee, not an independent contractor. Filing a 1099 instead of a W-2 is misclassification and will cost you in penalties.
4. Not tracking hours for salaried nannies. Even if you pay a weekly salary, you must track hours to ensure overtime compliance. A salary does not exempt a nanny from overtime under federal or most state laws.

The most expensive payroll mistake is not setting up payroll at all. The IRS catches up with household employers through W-2 discrepancies, unemployment claims, and Social Security benefit disputes. It is a matter of when, not if.