Nanny Tax Deductions: What Families Can (and Can't) Write Off

If you're paying for a nanny, you're probably wondering what tax breaks might help offset the cost. The truth is that nanny expenses work differently than most families expect when it comes to taxes. Understanding what you can and cannot deduct makes tax season less stressful and helps you plan your childcare budget more accurately.

This guide breaks down the most common tax questions families ask about nanny care, explains what expenses qualify for deductions or credits, and clarifies the rules around dependent care tax benefits.

Important Disclaimer: The Noble Nanny is not a tax professional or accounting firm. This guide provides general educational information only. Tax laws change frequently and vary by individual circumstances. Always consult a qualified CPA or tax advisor for advice specific to your family's situation.

Can You Deduct Nanny Wages on Your Taxes?

No. The wages you pay your nanny are not tax deductible as a business expense or personal deduction on your federal income tax return. Nanny salaries are considered personal expenses, not business expenses.

Even if you work from home or need childcare to earn income, the IRS does not allow you to deduct nanny wages. However, there are other tax benefits available that can help reduce your overall tax burden.

What Nanny Expenses Can You Deduct?

While you cannot deduct nanny wages, there is one important exception: employer payroll taxes.

Employer Payroll Taxes Are Deductible

When you hire a nanny legally, you're responsible for paying employer-side payroll taxes including Social Security and Medicare taxes (FICA), federal unemployment tax (FUTA), and state unemployment insurance.

The employer portion of these payroll taxes is tax deductible on your federal income tax return. You can claim this deduction on Schedule H (Household Employment Taxes) when you file.

Employer taxes represent roughly 10 to 12 percent of gross wages, so the deduction is helpful but limited.

Understanding your legal classification as a household employer is critical for tax purposes. Learn more about why your nanny is an employee, not a contractor, here.

Dependent Care FSA: A Valuable Tax Benefit

One of the best ways families can save on nanny costs is through a Dependent Care Flexible Spending Account (DCFSA).

How It Works

A Dependent Care FSA allows you to set aside pre-tax dollars from your paycheck to pay for eligible childcare expenses, including nanny care. The money is deducted before taxes, which lowers your taxable income.

For 2026, the maximum contribution is $5,000 per year for married couples filing jointly or single parents, and $2,500 for married individuals filing separately.

Because the money goes in before taxes, you avoid paying federal income tax, Social Security tax, and Medicare tax on those funds. Depending on your tax bracket, this can save 25 to 35 percent or more.

Important Limitations

Funds can only be used for care that allows you and your spouse to work or look for work and must be for children under age 13. You'll need to provide your nanny's Social Security number when filing. Funds typically must be used within the plan year, or you lose them, so plan carefully.

Child and Dependent Care Tax Credit

If your employer doesn't offer a Dependent Care FSA, or if your nanny expenses exceed the FSA limit, you may be eligible for the Child and Dependent Care Tax Credit.

How It Works

This federal tax credit allows you to claim a percentage of eligible childcare expenses, including nanny wages, on your tax return based on your income and care costs.

For 2026, you can claim expenses up to $3,000 for one child or $6,000 for two or more children. The credit percentage ranges from 20 to 35 percent, depending on your adjusted gross income. A tax credit directly reduces the tax you owe, making it more valuable than a deduction.

FSA vs. Tax Credit

You cannot use both a Dependent Care FSA and the full Child and Dependent Care Tax Credit for the same expenses. If you contribute to an FSA, your eligible expenses for the tax credit are reduced by that amount. Most families find that maxing out a Dependent Care FSA provides better tax savings but consult your tax advisor.

When Nanny Costs Might Be Deductible: Medical Necessity

In rare cases, nanny expenses may be deductible as a medical expense if the care is medically necessary due to a child's diagnosed medical condition or disability.

To qualify, you need documentation from a licensed healthcare provider stating the care is medically necessary. The care must go beyond typical childcare and include medical or therapeutic components. Medical expenses are only deductible when they exceed 7.5 percent of your adjusted gross income, a high threshold for most families.

This is a complex area of tax law, and most families will not qualify. If you believe your situation might meet these criteria, work with both your healthcare provider and a qualified tax professional.

State-Specific Tax Considerations

While federal tax rules apply nationwide, some states offer additional tax credits or deductions for childcare expenses. State rules vary significantly.

Some states, including California, New York, and others, provide state-level childcare tax credits that can supplement federal benefits. These credits may have different income limits and eligibility requirements.

You may also be able to deduct state unemployment insurance and other state-required employer taxes on your state income tax return. Check with a tax professional familiar with your state's tax code to maximize available benefits.

Tips for Maximizing Your Nanny Tax Benefits

1. Pay Your Nanny Legally

To claim any tax benefits related to nanny care, you must pay your nanny legally and on the books. This means withholding and paying all required taxes, providing a W-2 at year end, and keeping accurate payroll records. Paying a nanny under the table disqualifies you from FSAs, tax credits, and employer tax deductions.

2. Keep Detailed Records

Maintain thorough records of all wages paid, taxes withheld, and employer taxes paid throughout the year. You'll need this documentation to complete Schedule H and to substantiate any claims for dependent care benefits.

3. Provide Your Nanny's Tax Information

You'll need your nanny's Social Security number or tax identification number to claim dependent care benefits. Make sure you collect this information when you hire.

4. Contribute to a Dependent Care FSA if Available

If your employer offers a Dependent Care FSA, take full advantage of it. The pre-tax savings are typically more valuable than the dependent care tax credit for most middle- and upper-income families.

5. Work With a Tax Professional

Household employment taxes can be complicated, especially when combined with dependent care benefits and state-specific rules. A qualified CPA or tax advisor who understands household employment can help you navigate the rules and maximize your savings.

What You Cannot Deduct or Claim

To avoid confusion and potential issues with the IRS, it's important to know what does not qualify:

• You cannot deduct nanny wages as a business expense, even if you work from home

• You cannot deduct costs for care provided by a relative who lives in your home or a dependent under age 19

• You cannot claim tax benefits if you pay your nanny off the books or as a misclassified independent contractor

• You cannot double-dip by using the same expenses for both an FSA and the full dependent care tax credit

What About Health Insurance Benefits?

Many families wonder whether offering health insurance to their nanny provides any tax advantages. Unfortunately, the answer is no.

Health Insurance Stipends Are Not Deductible

If you provide a health insurance stipend or reimburse your nanny for health insurance premiums, these payments are not tax deductible. They are considered personal expenses, just like nanny wages.

Additionally, any health insurance stipend or reimbursement you provide is considered taxable income to your nanny and must be included on their W-2. You'll also need to withhold payroll taxes on these amounts.

No Special Tax Breaks for Household Employers

Unlike businesses that can deduct employee health insurance costs, household employers do not receive the same tax benefits. There are no federal tax deductions or credits available for providing health coverage to your nanny. While offering health benefits is a generous way to attract and retain quality caregivers, it does not reduce your tax burden.

Final Thoughts

While nanny wages themselves are not tax deductible, families do have access to valuable tax benefits through Dependent Care FSAs, the Child and Dependent Care Tax Credit, and deductions for employer payroll taxes. Understanding these options and how to use them correctly can save your family thousands of dollars each year.

The key is to pay your nanny legally, keep accurate records, and work with a qualified tax professional who can help you navigate the rules and maximize your savings.

If you're exploring nanny care and want to understand the full financial picture, working with a professional placement agency like The Noble Nanny can help you find trusted caregivers while ensuring you start off on the right legal and financial footing.

---

Ready to Hire a Nanny?

At The Noble Nanny, we help families navigate every aspect of hiring a nanny, from understanding costs and taxes to finding the perfect caregiver match. Our experienced placement team brings over 30 years of combined expertise to guide you through the process with confidence.

Before you start your search, learn how to hire the right nanny for your family here.

Schedule a free consultation today and let us support you through every step of the nanny hiring journey.