Can I use a DCFSA alongside the CDCC for nanny expenses?

Yes, but you cannot double-dip. DCFSA contributions ($7,500 limit under OBBBA 2026) reduce CDCC eligible expenses dollar-for-dollar. For most families with AGI above $150,000, the DCFSA saves more because it reduces FICA (7.65%) and income taxes, while the CDCC only reduces income taxes.

Nanny Tax Calculator

Q: What is the nanny tax and when does it apply?

The nanny tax is the informal name for household employment taxes reported on IRS Schedule H. It applies when you pay a household employee $2,800 or more in cash wages during the year (2026 threshold). You must withhold the employee's share of FICA (7.65%) and pay the employer's share (7.65%), plus FUTA and state unemployment taxes. Schedule H is filed with your Form 1040.

Q: What is the CDCC and how does it offset nanny costs?

The Child and Dependent Care Credit (CDCC) under OBBBA 2026 allows a credit of up to 50% of $3,000 (one child) or $6,000 (two or more children) in qualifying childcare expenses. At a 20% rate (AGI above $150K MFJ), the credit is $600 or $1,200. This credit is only available if you employ your nanny legally with a W-2, often making the legal route cost-neutral.

Calculate the true cost of employing a nanny legally. See employer FICA, FUTA, state unemployment, and how the CDCC tax credit can make legal employment cost-neutral compared to paying under the table.

Calculate the true cost of employing a nanny legally, including all employer taxes

Pay structure

Annual gross pay

Gross wages before any withholding

State

State unemployment rates vary significantly

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How to Use This Calculator

Employer Costs tab

The default tab. Enter your nanny's gross pay (annual salary or hourly rate with hours per week) and your state. The calculator shows your employer share of FICA (7.65%), FUTA ($42 max), state unemployment tax, and the true total cost of employing a nanny legally.

Nanny Take-Home tab

Enter the nanny's gross pay, filing status, and state. The calculator estimates employee FICA withholding (7.65%), federal income tax, and state income tax to show net take-home pay — annual, monthly, and weekly. Use this to set expectations during salary negotiations.

Legal vs Under-the-Table tab

The most important tab. Enter the annual pay, your household AGI, and number of children. The calculator compares the legal route (employer taxes + Schedule H, offset by the CDCC tax credit) against paying cash (no taxes, but no credit and major audit risk). For many families, the CDCC credit makes the legal route cost-neutral or even cheaper than paying under the table.

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The Formula

Household employers (Schedule H filers) owe the following taxes on nanny wages:

Employer FICA = Gross Wages × 7.65% (6.2% SS + 1.45% Medicare)

FUTA = min(Wages, $7,000) × 0.6% = $42 max

State Unemployment (SUTA) = min(Wages, State Wage Base) × State Rate

Total Employer Tax = Employer FICA + FUTA + SUTA

True Cost = Gross Pay + Total Employer Tax

Net Cost (with CDCC) = True Cost − CDCC Credit

The nanny tax threshold for 2026 is $2,800 in cash wages per employee. If you pay at least this amount, you must withhold and pay employment taxes. FUTA applies separately if you pay $1,000 or more in any calendar quarter.

The CDCC (Child and Dependent Care Credit) under OBBBA 2026 allows a credit of up to 50% of $3,000 (one child) or $6,000 (two or more children) in qualifying childcare expenses. The rate phases down based on AGI. At $150,000+ AGI (MFJ), the rate is 20%, yielding a $600 or $1,200 credit.

Example

The Chen Family — San Francisco, CA

The Chens hire a full-time nanny for their two children (ages 2 and 4) at $40,000/year. Household AGI is $180,000, filing MFJ. California new employer SUTA rate: 3.4% on first $7,000.

Employer Tax Costs

Nanny gross pay$40,000

Employer FICA (7.65%)$3,060

FUTA (0.6% on $7,000)$42

CA SUTA (3.4% on $7,000)$238

Total employer taxes$3,340

True cost (gross + taxes)$43,340

CDCC Offset

CDCC expense limit (2 children)$6,000

CDCC rate at $180K AGI (MFJ)20%

CDCC credit$1,200

Net cost after CDCC$42,140

Legal vs Cash Comparison

Legal route (net after CDCC)$42,140

Cash route (no credit)$40,000

Difference$2,140/year

The legal route costs only $2,140 more per year ($178/month). In return, the Chens get full legal protection from audit penalties that could exceed $10,000+, their nanny builds Social Security credits and qualifies for unemployment insurance, and they can sleep at night. If caught paying cash, they would owe back FICA ($6,120), 100% penalty ($6,120), plus interest and failure-to-file penalties.

FAQ

What is the nanny tax and when does it apply? ▼

The "nanny tax" is the informal name for household employment taxes reported on IRS Schedule H. It applies when you pay a household employee (nanny, housekeeper, caregiver, gardener, private chef) $2,800 or more in cash wages during the year (2026 threshold). You must withhold the employee's share of FICA (7.65%) and pay the employer's share (7.65%), plus FUTA and state unemployment taxes. Schedule H is filed with your Form 1040, and you must issue a W-2 to your employee by January 31.

What are the penalties for paying a nanny under the table? ▼

Paying a nanny off the books exposes you to serious penalties. The IRS can assess back taxes for both the employer and employee share of FICA, a 100% penalty on top of unpaid taxes, interest, and failure-to-file penalties ($290+ per W-2 not issued). In severe cases, it can be treated as tax evasion (criminal). The "nanny tax" issue has derailed numerous political nominations and careers. Beyond penalties, you lose access to the CDCC tax credit, and your nanny loses Social Security credits, unemployment insurance eligibility, and documented income history.

What is the CDCC and how does it offset nanny costs? ▼

The Child and Dependent Care Credit (CDCC) is a tax credit for childcare expenses that allows you to work. Under OBBBA 2026 rules, the credit rate ranges from 50% (AGI under $15,000) down to 20% (AGI > $150K MFJ). The maximum qualifying expenses are $3,000 for one child or $6,000 for two or more children under 13. At a 20% rate (most middle-to-upper-income families), the credit is $600 (one child) or $1,200 (two+ children). This credit is only available if you employ your nanny legally with a W-2 — paying cash means you forfeit it entirely.

Do I need to file Schedule H if I use a nanny agency? ▼

It depends on the arrangement. If the nanny is your employee (you control when, where, and how the work is done), you are the employer and must file Schedule H — regardless of how you found the nanny. An agency that simply refers a nanny to you does not become the employer. However, some agencies operate as the employer of record and handle all payroll taxes themselves. Clarify this in writing. If in doubt, the IRS generally considers household workers to be employees, not independent contractors. Misclassifying a nanny as a 1099 contractor is a common audit trigger.

Can I use a DCFSA (Dependent Care FSA) alongside the CDCC? ▼

Yes, but you cannot double-dip on the same dollars. If your employer offers a DCFSA, you can contribute up to $7,500 pre-tax (2026 OBBBA limit). The DCFSA reduces your CDCC eligible expenses dollar-for-dollar. For example, if you contribute $5,000 to a DCFSA and have two children, only $1,000 of your childcare costs ($6,000 limit minus $5,000 DCFSA) would qualify for the CDCC. For most families with AGI above $150,000, the DCFSA saves more than the CDCC because it reduces FICA (7.65%) and income taxes, while the CDCC only reduces income taxes. Use our FSA Calculator to compare DCFSA vs CDCC for your situation.

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