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When my small-business clients hire a nanny or other household employees like a senior caregiver or housekeeper, they often want to run their payroll through their small business’ payroll. After all, they already have an EIN and employees. Payroll is payroll, right?

Unfortunately, the IRS doesn’t see it that way. 

In today’s post, I’ll explain the tax rules for paying a nanny, caregiver, or other household employee, and I’ll tell you how you can avoid costly IRS mistakes as a household employer. Let’s start with the most basic question first. 

Can I run my nanny’s payroll through my small business payroll?

The short answer is no. Small business owners can’t run nanny payroll through their business payroll. Instead, if you meet the payroll threshold for 2026, you must:

1. Obtain a separate Employer Identification Number (EIN) for household employment.
2. Issue a W-2 to your nanny.
3. Report your nanny’s wages to the IRS and to your state’s revenue department.
4. Complete and file a Schedule H with your personal tax return if required under IRS rules.

These steps must be followed regardless of whether your business is an S-Corporation, LLC, or other business type.

Why can’t I run my nanny’s payroll through my business payroll?

If you’re the type that likes to understand why (love that about you!), then let me explain. If you employ a nanny, caregiver, or other household worker, you are doing so not as a business owner but as a household employer. In other words, the household employee doesn’t work for your business; they work for your family.

It’s important to understand that the IRS considers an employee to be a household employee if they work in your home and you control what work is done and how it’s done. Household employees can include:

• Nannies
• In-home caregivers for aging parents
• Household managers or personal assistants
• Housekeepers
• Gardeners
• In-home chefs or cooks
• Drivers

When employing someone in your home, you must use household employment rules, which means you need to pay the employee using a separate EIN and report their pay on your personal tax return.

Can I do my nanny’s payroll myself?

Yes, if you have the time and desire to do your nanny’s payroll by yourself, there’s no rule against you handling it on your own. You’ll just need to make sure you follow the 4 rules I outlined above, including issuing a W-2 and filing a Schedule H with your personal tax return.

I will caution you, though, that in practice, DIYing your nanny payroll can often lead to:

• Missed quarterly tax payments
• Incorrect withholdings
• Late or forgotten forms
• Confusion about what to file and when

What are my options for outsourcing nanny payroll and managing household employment taxes?

If you don’t want the hassle of handling your nanny payroll on your own, I don’t blame you! In fact, I often recommend that my clients outsource this responsibility so they don’t miss any steps and wind up messing up their small business taxes, their personal taxes, and their nanny’s taxes all at the same time.

A payroll service that is designed specifically for this situation and that I highly recommend is Poppins Payroll. Their services are a one-stop shop for families with household employees. 

They can help you:

• Get a household employer EIN
• Set up your state accounts
• File new hire paperwork
• Pay your regularly through direct deposit or check
• Withhold and pay required payroll taxes
• Handle federal tax filings
• Handle state tax filings
• Issue W-2s
• Provide a pre-filled Schedule H for your personal taxes
• Calculate wages, overtime, bonuses, and track PTO

What documents do I need to have to prepare my personal tax return when I have a nanny?

If you employ a nanny, caregiver, or other household employee, your tax preparer or accountant will typically ask you for:

• A copy of your household employee’s W-2
• Proof of quarterly payroll tax payments
• State household employment filings
• A completed or pre-filled Schedule H

Even if you already work with a CPA for your personal and small business taxes, using Poppins Payroll as your household payroll service makes everything that much simpler because most accountants don’t withhold and file the household employer taxes throughout the year as part of their tax preparation services.

They will also fill in and provide you with the documents you need. All you have to do is hand them over to your CPA, and your part is done. Trust me, your CPA will love this! And you’ll have peace of mind that everything was completed and reported correctly to the IRS.

What happens if I pay my nanny through my small business payroll?

If you incorrectly pay your nanny or other household employee through your small business’ payroll, this can lead to:

• Misclassification
• Incorrect tax filings
• Disallowed deductions
• IRS penalties

Let me give you an example: My client, Lucy, is a graphic designer who runs her own small business designing reusable Instagram and Etsy branding templates. The year before she became my client, her business really took off. She needed extra hands around the house, so she hired a nanny to take care of her 2 young children during the workday.

Since she’d already established an EIN and a payroll system for her 3 employees, she ran the nanny’s payroll through her business as well so she could “keep it simple.” On paper, this looked clean and made sense to her and to the nanny.

However, once she became my client, we went through her previous year’s tax filings and realized that Lucy had reported her nanny’s wages as business labor, which isn’t allowed. This, of course, also meant that Lucy’s personal taxes weren’t filed correctly because no Schedule H had been included with her personal return, and the nanny’s Social Security credits were also incorrect because of these filing errors.

Here’s the part to remember: In order to fix Lucy’s tax errors, we had to amend her payroll filings, correct the nanny’s W-2, and Lucy had to pay back taxes. So what started out as a way for Lucy to “keep it simple” ended up being far more expensive than if she’d done the nanny payroll and tax filing correctly to start with.

Can I just pay my nanny “under-the-table”?

I’ve had clients ask if they can just pay their household workers cash or through a cash app like Venmo so they can skip the payroll taxes altogether. Here’s the honest answer I give them: Paying a nanny or household worker “under-the-table” can lead to tax penalties and compliance issues once federal or state household employment thresholds are met.

For 2026, that federal threshold hits when you pay someone $3,000 or more in a year or $1,000 or more in any quarter.

If you skip out on paying a household employee correctly through payroll, this can cost you:

• Back taxes
• Hefty IRS penalties 
• Interest
• Loss of tax deductions
• Liability issues for hindering the employee’s access to benefits
• Potential tax fraud charges

And, just as importantly, if you don’t pay your household employee correctly through payroll, it hurts your employee. Without properly reported wages, they may lose access to:

• Documented income that can be used when applying for loans and mortgages
• Social Security and Medicare credits tied to covered earnings
• Eligibility for unemployment benefits, where applicable
• Access to potential state benefits, like paid sick leave or family leave

Do I need to give my nanny a W-2 or a 1099?

In most cases, nannies, caregivers, and other household workers are considered household employees under IRS rules, not independent contractors. That means they are typically paid as W-2 employees, not 1099 contractors. Issuing a 1099 to a nanny who qualifies as a household employee can be considered as misclassification and may trigger IRS and state tax penalties. Poppins Payroll will automatically generate a W-2 for your employee and a Schedule H for you, where applicable under federal and state rules. 

Abridged by Amy

The small business owners I work with are incredibly smart and responsible, but household payroll can catch even the most type-A person off guard. It’s a strange area of the tax law where the rules are different, the filings are different, and the risks of doing it wrong can be costly.

Just remember that you cannot run nanny payroll through your small business payroll, and it pays off (literally) to make sure that this is handled correctly. Services like Poppins Payroll exist so you don’t have to become a payroll expert or tax expert just to hire help at home. Our firm recommends Poppins to our clients because we know that they have transparent pricing, nationwide support provided by real humans, and a system built specifically for household employers. Their 4.8 Google rating and great customer reviews are proof!

From this CPA’s perspective, Poppins Payroll is one of those rare tools that genuinely makes everyone’s life easier, including small business owners, families, and tax professionals. Give them a try, and then thank me later.