Before you hire household staff: a readiness check, including past years paid off the books
Most of the advice about hiring household help focuses on the candidate. This post focuses on the household. Before a family adds a house manager, nanny, chef, or caregiver to payroll, a few questions about its own tax setup decide whether the first year goes smoothly. One of them is uncomfortable: whether someone has already been paid off the books, and what to do about it.
This post is a readiness check for the household's side of becoming an employer: cash flow for taxes, who approves payroll, which states are involved, the record system, and how to correct prior years where household wages were not reported. It does not evaluate candidates and it is not employment law advice. It is a list to work through with your preparer before the offer goes out.
Part one: the household's own tax setup
Can your estimated payments absorb Schedule H?
Household employment taxes are paid with your Form 1040 through Schedule H. A full-time employee at $80,000 adds about $6,120 of employer Social Security and Medicare for 2026, plus the employee's share if you withhold it and pass it through. If your safe harbor is based on last year's tax, that new tax is not in it. For 2026, the safe harbor is generally the smaller of 90% of this year's tax or 100% of last year's (110% if last year's AGI was over $150,000). Raise your withholding or estimated payments to cover the new payroll tax, or plan to.
Who will approve payroll?
Name one person who approves each payroll, reviews the register, and receives the state notices. If that person is a family member who travels, name a backup. Notices from state unemployment agencies have short response windows.
Which states are involved?
List each state where the employee will work. If the family has homes in more than one state and the employee travels with the family, you may need accounts in more than one state. Decide this before registering, not after the first quarterly return.
Where will the records live?
Payroll records need to be kept for at least four years. Decide where pay registers, W-2 copies, state filings, and the employee's forms will be stored, and who has access. Keep the Form I-9 in a separate file from tax records.
Is any of the work for a business?
If the employee will also do work for a family business, decide now which employer pays for which work. An earlier post in this series covers split roles.
Part two: the household's history
Has anyone been paid off the books?
Many families hire informal help for years before a formal hire: a nanny paid in cash, a cleaner who became a house manager, a relative who helps with a parent. If any one of them was paid $3,000 or more in cash wages in 2026 (the threshold was $2,800 for 2025 and $2,700 for 2024), Social Security and Medicare were probably owed, and possibly FUTA and state unemployment.
Family members on the list
Wages paid to some relatives are treated differently, and the rules are narrower than many families assume. For household work:
- Wages paid to your spouse are not subject to Social Security, Medicare, or FUTA.
- Wages paid to your child under 21 are not subject to Social Security, Medicare, or FUTA.
- Wages paid to your parent are not subject to FUTA, and are not subject to Social Security and Medicare unless an exception applies. One exception covers a parent who cares for your child under 18 (or a child who needs care for at least four straight weeks) while you are divorced, widowed, or married to someone who cannot care for the child.
- Wages paid to an employee under 18 are not counted toward the $3,000 test unless household work is the employee's main occupation.
- Siblings, adult children 21 or older, in-laws, and other relatives are generally treated like any other employee.
Wages excluded from payroll tax are still taxable income to the relative.
Why fix it before the new hire
A new hire creates a new state unemployment account and new filings. A state that sees a household employer appear suddenly with a long-time employee may ask about prior years. The employee may also need prior wage credits for Social Security, unemployment, or a mortgage application. And when a household employee files for unemployment, the state's first question is who the employer was.
How prior years are usually corrected
The details depend on how many years and how much, and your preparer should lead this. The usual path:
- Federal: file amended returns (Form 1040-X) with Schedule H for each open year, pay the tax, and expect interest and possibly penalties. Penalty relief, including first-time abatement and reasonable cause, can be requested.
- W-2s: issue Forms W-2 for each year to the employee and file them with the Social Security Administration, so the employee gets credit for the wages.
- State: register as a household employer, file the back returns, and pay unemployment tax for the years involved. Some states have voluntary disclosure programs that limit penalties.
- The employee's side: the employee may need to amend their own returns if the wages were not reported. That is the employee's matter and their own preparer's, but they will need the W-2s.
Generally, years beyond the period of limitations for assessment are not reopened, but a year for which no Schedule H was ever filed may not have a running period of limitations for employment taxes. Ask your preparer which years are open.
What not to do
Do not convert a long-time employee to a 1099 contractor going forward to avoid the history. If the work has not changed, the classification has not changed. Do not pay back taxes "to the employee" in cash. The tax goes to the IRS and the state, with the right forms.
Part three: before the offer
- An employer identification number for the household
- State withholding and unemployment registrations for each work state
- Workers' compensation coverage, where required
- Written pay terms, including overtime and benefits
- A payroll service, or a calendar for doing it yourself
- I-9 and W-4 ready for the first day
- A date for a mid-year check with your preparer on estimated payments
The scored diagnostic
Score each item 0, 1, or 2. Zero means not addressed. One means discussed. Two means done.
| Item | 0, 1, or 2 |
|---|---|
| Estimated payments are adjusted for Schedule H | |
| One person, with a backup, approves payroll and receives notices | |
| Every work state is identified | |
| A records location and retention period are set | |
| Business and household work are separated, if both apply | |
| Prior years of informal household wages are identified | |
| A correction plan for prior years is agreed with the preparer | |
| EIN, state accounts, and coverage are in place before the start date |
A total of 13 to 16 means the household is ready. A total of 8 to 12 means start the gaps now. Below 8, wait to set a start date until the history is addressed.
Illustrative: a nanny who became a house manager
Illustrative: A family paid a nanny $30,000 a year in cash in 2024 and 2025, with no payroll. In 2026 they want to hire her as a full-time house manager at $85,000. Before the new start date, their preparer files Forms 1040-X with Schedule H for 2024 and 2025, issues W-2s for both years, and requests first-time abatement for the penalties. The family registers with the state as a household employer and files back unemployment returns through the state's voluntary disclosure program. The 2026 payroll starts on time through a household payroll service, and the family raises its fourth quarter estimate to cover the new Schedule H amount.
Who owns what
- The household: the history, the decision, and naming the payroll approver.
- Your preparer: amended returns, penalty relief requests, and estimated payment changes.
- The payroll provider: current-year filings and state registrations.
- An employment attorney: classification disputes, contracts, and state wage law.
Next step: list everyone the household paid for regular work in 2024, 2025, and 2026, with the amount, and review the list with your preparer before you post a job.
Educational only. This is not tax or legal advice for your situation. Consult your own CPA, EA, or attorney before acting.
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