The "Nanny Tax" in 2026: Why Venmo Isn’t Payroll (and How to Stay Out of Trouble)
You finally found the perfect nanny. The kids love her, she’s never late, and for the first time in years, your house doesn't look like a tornado hit it. Life is good.
Then you hand her a check (or Venmo her) at the end of the week, and she asks, "Hey, do you need my Social Security number for a W-2?"
Panic sets in. You thought you were just paying a neighbor to help out. But in the eyes of the IRS and the Commonwealth of Virginia, you might have just become an employer. And with that title comes a laundry list of responsibilities that "paying under the table" just won't fix.
Let’s be real: Tax law is messy. But ignoring the "Nanny Tax" (officially known as Household Employment Taxes) is a dangerous game that can lead to massive penalties, back taxes, and even blown security clearances for government contractors here in RVA.
Here is your 2026 guide to getting it right.
The Core Rule: Employee vs. Independent Contractor
The biggest mistake I see Richmond families make is assuming their nanny is an independent contractor (1099) rather than an employee (W-2).
You do not get to choose this label. The law chooses it for you based on control.
According to the IRS (and reinforced by the "One Big Beautiful Bill Act" enforcement priorities), a worker is a household employee if you control:
What work is done.
When it is done.
How it is done.
If you tell your nanny to arrive at 8:00 AM, feed the kids specific meals, and put them down for a nap at 1:00 PM using your crib and your supplies, that is an employee.
If you hire a lawn service that brings their own mower, sets their own schedule, and services 20 other houses in the Fan, that is a contractor.
The Magic Numbers: $2,800 vs. $3,000
The IRS has distinct thresholds for when you must start paying taxes. Because we are currently in filing season for 2025 but planning for 2026, you need to know both numbers:
2025 Tax Returns (Filed April 2026): The threshold was $2,800. If you paid any single household employee more than this in calendar year 2025, you must file Schedule H with your personal 1040.
2026 Tax Planning (Current Year): The threshold has bumped up to $3,000. If you expect to pay a worker more than this in 2026, you need to set up payroll now.
Note: This applies to cash wages. It does not include amounts you pay to your spouse, your child under 21, or your parent (with some rare exceptions).
Step-by-Step: How to legitimize Your "Nanny Payroll"
If you’ve triggered the threshold, here is your compliance checklist.
1. Get an EIN (Federal)
You cannot use your Social Security Number to file W-2s. You need a separate Employer Identification Number (EIN) for your household "business." You can apply for this instantly on IRS.gov.
2. Register with Virginia (VEC)
In Virginia, you are likely liable for State Unemployment Tax (SUTA) if you pay cash wages of $1,000 or more in any calendar quarter.
Register: Use the Virginia Employment Commission (VEC) iReg system.
Rate: New employers in Virginia typically start at a tax rate of 2.5% (plus pool charges) on the first $8,000 of wages per employee.
3. Verify Eligibility (Form I-9)
Just like a corporate employer, you must verify that your household employee is eligible to work in the U.S. Have them complete Form I-9. Keep this in your files; do not file it with the government.
4. Handle the Taxes (The "Nanny Tax" Trinity)
Here is what comes out of the paycheck (or your pocket):
Pro Tip: You are not required to withhold Federal or State Income Tax for household employees, though you can if they ask you to.
Real-World Example: The Millers in Midlothian
Let’s look at a concrete scenario. The Miller family hires a nanny, Sarah, for 2026.
Agreed Pay: $25 per hour, 30 hours/week ($39,000/year).
Location: Chesterfield County, VA.
Here is how the math breaks down for the Millers:
1. Employee Withholding (Deducted from Sarah's Pay):
Social Security (6.2%): $2,418
Medicare (1.45%): $565.50
Net Pay to Sarah: $36,016.50 (assuming no income tax withholding)
2. Employer Cost (Paid by the Millers):
Employer Social Security Match: $2,418
Employer Medicare Match: $565.50
Federal Unemployment (FUTA) ($7,000 cap x 0.6%): $42
VA Unemployment (SUTA) ($8,000 cap x ~2.5%): $200
Total Employer Tax Cost: $3,225.50
Total Cash Out the Door: $39,000 (Wages) + $3,225.50 (Taxes) = $42,225.50
Common Pitfalls & "Gotchas"
1. The "Venmo" Trap
Electronic records are forever. If you are paying a nanny weekly via Venmo or Zelle and not reporting it, you are leaving a digital paper trail of tax evasion.
2. Workers’ Comp in Virginia
Virginia generally requires Workers’ Compensation insurance if you have three or more employees. However, voluntary coverage is often smart even for one employee. If Sarah slips on your icy driveway while working, your homeowner's policy might not cover her medical bills if she’s classified as an employee.
3. Underwithholding Your Own Taxes
Because household employment taxes (Schedule H) are reconciled on your personal Form 1040, adding $3,000+ in tax liability can trigger an underpayment penalty.
The Fix: Increase withholding at your day job (submit a new W-4) or make estimated quarterly tax payments (Form 1040-ES) to cover the nanny taxes.
FAQ
Q: Can I just have my nanny sign a contract saying she is an independent contractor?
A: No. A contract cannot override federal law. If you control the work, she is an employee.
Q: My nanny is my 19-year-old niece. Do I still have to pay?
A: Yes. The exceptions are for children under 21, spouses, and parents. Nieces, nephews, and aunts are subject to the same rules as strangers.
Q: What happens if I get caught?
A: You will owe the back taxes (both yours and the employee's share), interest, and failure-to-file penalties. In Virginia, the VEC is particularly aggressive about unpaid unemployment taxes.
Ready to Legitimize Your Payroll?
I know—reading Treasury Regulations isn't your idea of a fun Friday night. But sleeping soundly knowing you aren't an accidental tax evader? That's priceless.
At The RVA Accountant, we help families set up household payroll correctly from Day 1, ensuring you catch every deduction while staying compliant.
This article is for educational purposes only and does not constitute tax, legal, or accounting advice. Consult with your tax advisor before implementing any strategy discussed here.