Do I pay nanny taxes if a grandparent or relative is the caregiver?
Updated November 6, 2026 · For 2026 · General information, not tax or legal advice
Paying a family member for child care is common and completely fine. Whether payroll taxes apply depends on exactly which relative.
Exempt relatives
Wages you pay to these people are not subject to Social Security, Medicare or federal unemployment tax, no matter the amount:
- Your spouse.
- Your child under 21.
- Your parent, with one exception. If your parent cares for your child who is under 18 or has a disability, and you are divorced and not remarried, widowed, or living with a spouse who is physically or mentally unable to care for the child, then the wages *are* subject to Social Security and Medicare (but still not unemployment tax).
Because no payroll taxes apply and you are not required to withhold income tax, there is usually nothing to file: no Schedule H and no W-2, unless you choose to withhold income tax at their request.
Everyone else is a regular employee
A grandparent who is your spouse's parent is an in-law, not your parent, and is treated like any nanny once wages cross $3,000. The same goes for siblings, aunts, cousins and adult children 21 and older. Withhold 7.65%, match it, pay unemployment tax, issue a W-2 and file Schedule H.
The relative still has income
Exempt from payroll tax does not mean tax-free. The pay is ordinary income to the relative, reported on their return. A retired parent should check how added earnings affect their Social Security benefits if they are under full retirement age.
Child care credit and FSA
Payments to a relative qualify for the child and dependent care credit and a dependent care FSA as long as the caregiver is not your spouse, not the child's other parent, and not your own dependent or your child under 19. Report their name and Social Security number on Form 2441.
State rules
Most states mirror the federal family exemptions for unemployment tax, but check your state guide. If the relative is a regular employee, the state side is the same as for any nanny.
Frequently asked
Do I withhold Social Security if my mother is our nanny?
Usually not. Wages to your parent are exempt from Social Security and Medicare unless your child is under 18 or disabled and you are divorced and not remarried, widowed, or living with a spouse who is disabled. Unemployment tax never applies to a parent.
Is my sister or mother-in-law exempt?
No. The exemptions cover only your spouse, your parent and your child under 21. Siblings, in-laws, aunts and grandparents who are not your parent are ordinary household employees.
Does my parent still owe income tax on the pay?
Yes. The wages are taxable income to them even when payroll taxes do not apply. You can withhold income tax if they ask, and the pay still qualifies for the child care credit or a dependent care FSA.
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