Catch Up on Nanny Taxes: A Guide for Household Employers Who Paid Under the Table

This is a common situation. Most families who end up paying under the table didn't set out to dodge anything. They hired someone they trusted, agreed on a wage, and paid in cash because that's what felt simple. By the time anyone uses the phrase "household employer," they're already six months or two years into an arrangement nobody framed as employment.

This guide walks through what you actually owe, what happens if you fix it, what happens if you don't, and how the catch-up process works in practice.

Are you actually a household employer?

The IRS definition is straightforward but often surprising: you're a household employer if you pay someone to do work in or around your home and you control how that work is done.

That includes nannies, housekeepers, in-home caregivers for elderly parents, personal assistants, private chefs, and household managers. It does not include independent contractors who run their own businesses (a plumber, a one-time house cleaner from a service, a gardener with multiple clients and their own equipment).

Two things often confuse families:

If any of that describes your situation, the rest of this guide is for you.

What you actually owe

Employer payroll taxes for household employment typically run 9–13% of gross wages, depending on your state. California, with its SDI and PFL programs, runs closer to 11–12%. Texas and Florida, without state income tax, can come in under 10%.

Federal payroll taxes (apply everywhere)

• Social Security and Medicare (FICA): 7.65% paid by the employer. The employee owes a matching 7.65%, but if you didn't withhold it from their paychecks, you're typically on the hook for both halves when catching up.
• Federal Unemployment (FUTA): 0.6% on the first $7,000 of wages per employee, after the standard credit for state unemployment payments.

State payroll taxes (vary)

• State unemployment insurance (SUI): Varies widely. Often 1–4% on a capped wage base.
• State disability and paid family leave (where applicable): California, New Jersey, New York, Hawaii, Rhode Island, and a handful of others. California's SDI alone is over 1% of wages with no cap.

A worked example: a family in California paying a nanny $25/hour for 40 hours a week — about $52,000 a year in gross wages — typically owes around $4,800 in employer-side taxes annually. That's roughly 9.2% of wages.

For catch-up filings, the bill is often higher than the going-forward rate, because if you didn't withhold the employee's share of FICA (7.65%) from their paychecks, you'll usually owe both halves. That can push the effective rate closer to 17% of wages owed for prior years.

What happens if you fix it

This is the section most families skim past, and it's the most important one.

State outcomes vary, but they're usually manageable. State unemployment agencies typically charge interest and a modest late penalty, but most don't pile on the kind of fees that make headlines. Penalties we've seen on real catch-up filings range from $15 per quarter to $150 per quarter, depending on the state. Not zero, but not catastrophic.

The IRS lookback for unfiled returns is generally three years from the date you eventually file — not from the date the work was done. Catching up now puts a clear endpoint on your exposure.

Your employee benefits, too. Once W-2s are filed for prior years, your employee gets credit toward Social Security retirement and disability, becomes eligible for unemployment insurance if they lose work, and has documented income if they want to apply for a mortgage, a lease, or a credit card. For lower-earning employees, filing back taxes often results in a refund through the Earned Income Tax Credit and Child Tax Credit — meaning the catch-up is sometimes a net positive for them, not a cost.

The cleanest path is to come forward before anyone forces the issue. Which brings us to the other side.

What happens if you don't

Two things tend to surface unreported household employment:

The employee files their own taxes and reports the wages. Less common, but it happens. If your employee gets advice from a tax preparer who tells them to report income honestly, the IRS gets a 1040 showing household employment that wasn't reported on anyone's Schedule H. That can trigger correspondence to the employer.

A third, rarer scenario: divorce. Family court financial disclosures sometimes surface unreported household employment when one spouse hires a forensic accountant.

Eight reasons it's worth getting on the books

Beyond avoiding penalties, paying legally has practical upside that doesn't get talked about enough:

1. You stay compliant going forward, with documentation to prove it. If an employee ever files for unemployment, you have a clean record.
2. You may qualify for the Dependent Care Tax Credit — a federal credit covering up to 50% of qualifying childcare expenses for 2026 (up from 35% previously). Eligible expenses are capped at $3,000 for one child or $6,000 for two or more, and the actual percentage scales down with income.
3. You can use a pre-tax dependent care FSA — the federal limit increased to $7,500 a year for 2026 (up from $5,000). Your employer's plan may still cap at $5,000 — check with HR. For a family in the 24% bracket fully funding $7,500, federal income tax savings alone are $1,800.
4. Your employee gains verifiable income — useful for mortgages, leases, auto loans, credit applications.
5. Your employee builds Social Security and Medicare credits that will affect their retirement and disability benefits.
6. Your employee becomes eligible for unemployment insurance if they're laid off — a meaningful safety net most cash-paid household employees don't have.
7. In states with paid family leave (California, New York, New Jersey, and others), your employee becomes eligible for paid leave for new children or family medical needs.
8. You can offer tax-free benefits like contributions to your employee's health insurance premium — typically $50 to $200 per month — which both improves their compensation and reduces your taxable wage base.

For many families, the financial math actually favors going legal once you account for the tax credits and FSA savings. For a deeper walkthrough of what's available, see our complete guide to nanny tax breaks.

How catch-up actually works

The mechanical process has four steps:

You can do this yourself if you have time, patience, and tolerance for state-by-state research. You can also work with a CPA who handles household employment (most don't — make sure you ask). Or you can use a service like Nest Payroll that handles the entire process end-to-end: we file W-2s with the Social Security Administration, prepare your Schedule H, and submit federal tax payments through EFTPS on your behalf.

Pricing for catch-up

If you're using Nest Payroll for catch-up:

Once you're caught up, you continue on a standard plan from $42/month for ongoing payroll. See full pricing →

Frequently asked questions