What a household employee really costs in 2026: payroll taxes, benefits, and insurance

When a household budgets for a house manager, nanny, chef, or caregiver, the number on the offer letter is usually the only number anyone writes down. The real cost is higher. Employer payroll taxes, state unemployment, workers' compensation, benefits, and the cost of running payroll all sit on top of the salary, and none of them is deductible for personal household work.

This post builds the full 2026 cost of a household employee, line by line, and lists the records that support each number. It does not cover whether to hire, what to pay, or how to measure the value of the work. Those are the family's decisions. It covers what the tax and payroll side adds, so the budget and the return agree.

Line 1: cash wages

Start with gross cash wages, including overtime and any bonuses. Bonuses, holiday gifts of cash or gift cards, and payments for extra events are all wages. If the household agreed to a "net" salary (what the employee takes home), the gross wage is higher, because the household is covering the employee's taxes. Agreeing to a net figure is common in household employment and almost always underestimated.

Line 2: employer Social Security and Medicare

For 2026, the employer pays 6.2% Social Security on wages up to $184,500 and 1.45% Medicare on all wages, once the employee is paid $3,000 or more in cash wages for the year. That is 7.65% on most household salaries. If the household also pays the employee's 7.65% share instead of withholding it, that payment is additional income tax wages to the employee, though it is not itself subject to Social Security and Medicare for household employees.

Line 3: federal unemployment

FUTA applies once household cash wages reach $1,000 in any calendar quarter of 2025 or 2026. It is 6% on the first $7,000 per employee, reduced to 0.6% ($42 per employee) when state unemployment tax is paid on time. In a credit reduction state, the credit is reduced and the federal cost goes up. The Schedule H instructions list the 2026 credit reduction states.

Line 4: state unemployment and other state payroll taxes

State unemployment rates for new employers vary widely, and each state sets its own wage base. Some states add disability insurance, paid family leave, or other payroll contributions, some paid by the employer and some withheld from the employee. A few cities add local payroll or income taxes. The state employer account notice shows your assigned rate. Keep it with the payroll file.

Line 5: workers' compensation

Many states require workers' compensation coverage for domestic employees, sometimes above a weekly hours threshold. Where it is not required, a policy is still common, and some homeowner's policies offer limited coverage. The premium is an insurance cost, not a tax, but it belongs in the budget and the policy belongs in the file.

Line 6: benefits

• Health coverage. Premiums paid directly for an employee's coverage, or reimbursed against proof of coverage, are generally excluded from the employee's wages. They are a real cost to the household.
• Paid time off. Vacation, holidays, and sick leave are wages when paid. Several states and cities require paid sick leave for domestic workers.
• Transit and parking. Up to $340 a month each for 2026 can be provided tax free.
• Retirement. Retirement arrangements for household employees exist but are limited, and the rules are specific. Ask a plan provider before promising one in the offer.
• Lodging and meals. Lodging provided on the premises for the employer's convenience, as a condition of the job, can be excluded from wages. It still has a cost.
• Cars, phones, and travel. Household-paid items used personally by the employee may be taxable wages unless a use log or policy supports the business portion.

Line 7: running payroll

A household payroll service typically charges a monthly fee. Add the preparer's time for Schedule H and any state filings that are not included. If the household handles payroll itself, add the hours. The cost of a missed state filing is a penalty notice, often with interest from the original due date.

Line 8: the effect on your own estimated taxes

Household employment taxes are paid with your Form 1040 through Schedule H. If they are not covered by your withholding or estimated payments, they can trigger an underpayment penalty on your personal return. For 2026, that penalty is driven by the IRS underpayment rate, which is 7% for the fourth quarter. Build the Schedule H amount into the safe harbor calculation.

Offsets that apply to some households

Household wages are not deductible, but a few rules reduce the cost when the employee cares for children or dependents:

• Dependent care assistance. If a parent's employer offers a dependent care flexible spending account, up to $7,500 per household can be excluded from that parent's wages starting in 2026, and used to pay a nanny's wages.
• Child and dependent care credit. Wages paid to a nanny or caregiver for a child under 13 or a qualifying dependent can count toward the credit, subject to the dollar limits and income-based percentage for 2026, and reduced by any amount excluded through a flexible spending account.
• Medical care. Wages for a caregiver who provides nursing-type services to a chronically ill person may count as medical expenses, subject to the 7.5% of AGI floor.

Each requires the employee's Social Security number on the return and payroll records that match.

Putting it together

A simple worksheet:

• Cash wages (with overtime and bonuses)
• Employer Social Security and Medicare (7.65%)
• FUTA (0.6% of the first $7,000, or more in a credit reduction state)
• State unemployment and other state payroll taxes
• Workers' compensation premium
• Health premiums and other benefits
• Paid time off not already in wages
• Payroll service and preparer fees
• Gross-up cost, if pay was agreed net

Total, then divide by cash wages. For many full-time household employees, the result runs well above the salary alone. The point of the exercise is to put an accurate number in the budget and to make sure every line has a record.

The scored diagnostic

Score each item 0, 1, or 2. Zero means not known. One means estimated. Two means known from a current document.

Item	0, 1, or 2
Gross wages, including bonuses and overtime, are known
Employer payroll tax is calculated at 2026 rates
State unemployment rate notice is on file
Workers' compensation policy is on file
Benefit costs are listed with how each is taxed
Gross-up cost is calculated if pay was agreed net
Schedule H amount is built into estimated payments
Payroll service and preparer fees are in the budget

A total of 13 to 16 means the budget matches what the return will show. A total of 8 to 12 means some costs are missing. Below 8, rebuild the number before the next raise or hire.

Illustrative: a full-time nanny

Illustrative: A family pays a full-time nanny $75,000 a year in cash wages, plus a $3,000 holiday bonus, for total 2026 cash wages of $78,000. Employer Social Security and Medicare at 7.65% is $5,967. FUTA is $42. The state assigns a new employer unemployment rate that applies to the state's wage base, and the state also requires a small paid family leave contribution. The family pays $400 a month toward the nanny's health insurance directly to the insurer, which is excluded from wages. They pay a household payroll service monthly. They add the Schedule H amount to their fourth quarter estimated payment due January 15, 2027. Every line is supported by a document in the payroll file.

Records to keep

• Payroll registers and pay stubs
• State account notices and rate letters
• Workers' compensation and insurance policies
• Benefit invoices and proof of payment
• Copies of Forms W-2, W-3, Schedule H, and state filings, for at least four years

Who owns what

• The household: the budget, written pay terms, and approving payroll.
• Your preparer: Schedule H and the estimated tax effect.
• The payroll provider: state rates, deposits, and filings.
• An insurance agent: workers' compensation and liability coverage.

Next step: fill in the worksheet for each household employee using last month's payroll register, and send the total to your preparer with your fourth quarter estimate questions.

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Educational only. This is not tax or legal advice for your situation. Consult your own CPA, EA, or attorney before acting.