Many working parents have had issues and complaints with daycare and childcare centers, so more are choosing to hire a nanny or share one with another family. However, many parents are not fully aware of the financial and legal risks that come with bringing a nanny into the home.
When you hire a nanny, you become an employer. If you improperly pay the nanny or fail to withhold payroll taxes, you can face IRS problems, penalties, and fines; even correct withholdings can result in penalties if not calculated or submitted on time. One way to reduce that risk is to use a payroll provider or professional service to handle taxes and reporting properly, and for more on employer obligations see Managing Risk and Costs in Insurance.
Another financial risk is a workplace injury to your nanny. Purchasing Workers' Compensation protects you from having to pay the benefits the nanny would have received under such a policy, plus any state penalties that might apply. Do not assume a homeowners or umbrella policy will cover a nanny’s work injury, because those policies often exclude injuries that Workers' Compensation would normally cover.
You should also consider an umbrella policy that includes excess employer's liability coverage beyond Workers' Compensation limits. A nanny's spouse, children, or other family members could bring a lawsuit for loss of services if the nanny is injured, and those claims can easily exceed Workers' Compensation limits.
If you share a nanny and another family's child is injured while in your home, you could still be sued even if the other parent helped hire or vet the caregiver. If you share caregiving, make sure your umbrella limits are high enough to protect your assets, and consider reviewing your options with a professional—if you want help, you can talk to an agent.
To avoid many of the employment-related liabilities while still having a personal nanny, consider hiring through an agency. When the nanny is employed by an agency, payroll taxes, insurance coverage, and background and reference checks are the agency’s responsibility, not yours. Agencies may also provide backup caregivers and other conveniences; for information about background checks and related screening, see Understanding Vehicle Theft and Employment Background Checks.
Before hiring any nanny, document the employment arrangement in writing, confirm who is responsible for payroll and Workers' Compensation, and keep clear records of wages and tax filings. A brief employment agreement and professional advice can reduce confusion and financial exposure.
Frequently Asked Questions
Do I have to withhold payroll taxes for a nanny?
Yes—if the nanny meets your jurisdiction's employee tests, you are typically responsible for withholding and paying payroll taxes unless an agency employs them.
Is a nanny covered by my homeowners policy if injured on the job?
Usually not; homeowners and personal umbrella policies often exclude injuries that Workers' Compensation would cover, so a Workers' Compensation policy is typically required.
When should I buy employer's liability or umbrella coverage?
Consider excess employer's liability and umbrella coverage if you employ someone directly or share a nanny, since lawsuits can exceed Workers' Compensation limits.
What are the main benefits of using a nanny agency?
An agency can handle payroll, taxes, insurance, background checks, and provide backup caregivers, shifting many employer responsibilities off your household.