Last updated: March 2026

Household employer payroll: nanny taxes, church payroll, and clergy

Household employers and churches share one problem: they become employers without realizing it. A family hires a nanny and pays cash for six months before learning they owe back taxes on every dollar. A church board votes to pay the pastor a salary and discovers that clergy are employees for income tax and self-employed for Social Security simultaneously. I've cleaned up both situations dozens of times, and the penalties are always worse than the taxes would have been if filed correctly from the start.

This section covers payroll for people who employ individuals rather than staffing a company. The tax rules are different, the filing thresholds are lower, and the mistakes are more expensive per dollar of wages than any other payroll category.

Nanny and household employment

If you pay a household employee $2,700 or more in a calendar year, you owe nanny tax. That threshold applies retroactively from dollar one once crossed. Pay a nanny $2,600 and you owe nothing. Pay her $2,700 and you owe Social Security and Medicare taxes on the full $2,700, not just the $100 over the threshold. This catches families every January when they realize the previous year's payments crossed the line sometime in October and they never withheld anything. IRS Publication 926 covers the full household employer tax obligation.

The $2,700 threshold is the most expensive number most families have never heard of.

Nanny payroll taxes include the employer share of FICA (7.65%), the employee share of FICA (7.65% that you should have been withholding), federal unemployment tax (FUTA), and state unemployment tax. Federal income tax withholding is optional for household employees, but if you don't withhold it and the nanny doesn't make estimated payments, the nanny owes a lump sum at tax time that strains the relationship. The tradeoff with nanny payroll is between doing it yourself on Schedule H and using a nanny payroll service. Schedule H costs nothing but requires you to track wages, calculate taxes, and file correctly. A nanny payroll service costs $40 to $75 per month but handles withholding, tax deposits, W-2 preparation, and state filings automatically.

Babysitter taxes follow a different threshold. A babysitter under age 18 whose primary occupation is not household employment (a high school student, for example) is exempt from FICA regardless of how much you pay them. Once they turn 18 or household work becomes their primary job, the $2,700 threshold applies. The distinction between a nanny and a babysitter isn't frequency or hours. It's age and primary occupation. Getting that classification wrong means either overpaying taxes you don't owe or underpaying taxes you do. When this exemption fails: a 17-year-old who has dropped out of school and works as your full-time household employee is not exempt, because household work is their primary occupation regardless of age.

Church and clergy payroll

Church payroll is the most technically complex payroll in any industry. Ministers hold a dual tax status unique to the U.S. tax code: employee for income tax, self-employed for Social Security and Medicare, on the same paycheck. The housing allowance can reduce a pastor's taxable income by $20,000 to $40,000 per year, but only if the church board designates it correctly in advance. Non-minister church staff (secretaries, custodians, musicians) are regular W-2 employees with standard FICA withholding.

No other employment category in the tax code creates this kind of dual status on a single paycheck.

The mistakes are specific and expensive. Churches that withhold FICA from a minister's pay create a filing mess that requires amended W-2s and 941s. Ministers who file Form 4361 to opt out of Social Security save on SE tax but forfeit an estimated $400,000+ in lifetime benefits. When the housing allowance backfires: ministers who own no home and rent an apartment that costs less than the designated allowance amount, creating excess allowance that becomes taxable income they did not expect. The church payroll guide covers setup, common errors, and which providers handle it correctly. The clergy payroll guide goes deeper on the minister's side: SE tax calculations, housing allowance optimization, and the Form 4361 decision.

What household employer payroll costs

For nanny payroll, the employer's tax obligation runs 9% to 11% of wages: 7.65% employer FICA plus 1% to 3% state unemployment. On a $35,000 annual nanny salary, that's $3,150 to $3,850 in employer taxes. A nanny payroll service adds $500 to $900 per year. Doing it yourself on Schedule H saves the service fee but requires quarterly estimated tax payments if you don't increase your own income tax withholding to cover the liability.

Most families discover Schedule H exists in April, months after they should have started making estimated payments.

Church payroll costs are similar to any small employer ($40 to $150 per month), but the hidden cost is getting clergy tax treatment wrong. A single year of incorrect FICA withholding on a minister generates amended filings, refund claims, and potential penalties. The cheapest path is a provider that handles clergy dual-status natively or a CPA who specializes in church accounting. When this cost estimate is too low: churches with a K-12 school on the same payroll, where teacher contracts, benefit plans, and FICA treatment for lay employees create a volume and complexity level that exceeds what a $40 per month payroll service can support.

Guides by topic

Church payroll covers the full setup: minister vs non-minister classification, FICA treatment, withholding rules, and which payroll providers handle it correctly. Clergy payroll goes deeper on dual-status mechanics, Form 4361 (the SE tax opt-out that almost no minister should file), and quarterly estimated payments. Minister housing allowance covers the designation process, limits, documentation, and the board resolution language that protects the exclusion on audit.

Nanny payroll taxes breaks down every obligation with specific dollar examples at common salary levels. How to pay a nanny legally walks through the process from the first paycheck through year-end W-2 filing. Babysitter taxes clarifies who owes what and when the exemptions apply. If you're evaluating payroll software for either household or church use, the payroll provider comparisons identify which platforms handle these niche configurations.

Written by a Certified Payroll Professional with 30 years of experience.

This is not legal or financial advice. Consult a qualified professional for your specific situation.