Nanny: Employee or Independent Contractor? The IRS Control Test

Last updated September 28, 2026

General information, not advice: this page covers tax and employment topics in general terms. It is not tax or legal advice, and reading it does not create a CPA–client relationship. Tax and labor rules vary by state and situation — consult a qualified professional for your circumstances.

“Just pay her as a contractor — it’s simpler” is the most expensive sentence in household employment. It sounds like a paperwork shortcut. The IRS treats it as tax evasion when the facts don’t support it. This page explains the control test that decides the question, why a typical nanny arrangement fails it completely, and the three housekeeper scenarios that actually differ.

The rule: facts decide, not labels

The IRS determines worker status using the common-law control test: does the employer have the right to direct and control how, when, and where the work is done? The IRS groups the evidence into three categories (see IRS Topic 756 and Publication 926):

1. Behavioral control — Do you instruct when, where, and how the work is done? Do you provide training? A nanny who follows your daily schedule, your feeding and nap routines, your discipline rules, and your household procedures is under behavioral control.
2. Financial control — Does the worker have unreimbursed business expenses, offer services to the general public, and face the possibility of profit or loss? A nanny paid hourly with no business expenses, no other clients, and no opportunity for profit or loss looks like an employee.
3. Relationship of the parties — Is the work central to an ongoing relationship? Written contracts describing the relationship, permanency, and whether benefits are provided all count. A nanny working 40 hours/week indefinitely for one family is in an ongoing employment relationship.

The decisive sentence from Publication 926: a household worker who works in your home, on your schedule, following your instructions is your employee — even if you both signed a paper calling her a contractor. The IRS says explicitly that a written agreement cannot override the facts of the relationship.

The “independent contractor agreement” myth

Families download “independent contractor agreements” for nannies believing the document changes the tax treatment. It doesn’t. Here’s why the myth persists and why it’s wrong:

• It persists because for a while, nothing happens. The IRS doesn’t audit every household. The arrangement “works” until it doesn’t — usually when the worker files for unemployment, gets injured, or the relationship ends badly and someone talks to an agency.
• It’s wrong because classification follows control, not paperwork. If you set the hours, direct the daily work, provide the workplace (your home) and the tools (your kitchen, your car seats, your supplies), and she’s economically dependent on the arrangement — she’s an employee. A contract saying otherwise is evidence of intent, not of facts.

What misclassification costs

When the IRS (or your state) reclassifies a worker:

• Back employment taxes — the employer’s share of Social Security and Medicare (7.65%) for every year of the arrangement, plus federal and state unemployment taxes
• Penalties and interest — failure-to-file, failure-to-pay, and accuracy penalties compound; interest accrues from the original due dates
• The worker’s exposure — misclassified workers owe self-employment tax (15.3%) they wouldn’t have owed as employees; some will come back to you for it
• State consequences — workers’ comp violations, state unemployment insurance, and in some states, misclassification carries additional fines per worker

The total routinely exceeds what proper payroll would have cost by multiples. A payroll service runs $30–$60/month; a reclassification audit runs into five figures.

The three housekeeper scenarios (these actually differ)

Housekeepers are where the test produces different answers depending on the facts:

Scenario A: Direct-hire housekeeper — your employee. She comes every Tuesday 9–1, you tell her which rooms and how you want them done, you provide the supplies, she’s worked for you for two years. Behavioral control: yes. Financial control: no independent business. Employee. Same treatment as a nanny.

Scenario B: Cleaning service that employs its own staff — not your employee at all. You contract with a company; the company sends whoever it sends, sets their schedules, pays them, and carries the insurance. You pay the company, not the cleaner. The cleaners are the company’s employees. You have no employment relationship and no household payroll obligation. (You should still confirm the service carries workers’ comp and liability — ask for the certificate.)

Scenario C: True independent cleaner — genuinely self-employed. She sets her own schedule across multiple clients, brings her own supplies and equipment, quotes by the job rather than by the hour, and could send a substitute. She markets her services to the public and bears profit/loss risk. Independent contractor — you issue a Form 1099-NEC if you pay her $600+/year, and you owe no payroll taxes.

The difference between A and C is entirely about control and independence: who sets the schedule, who provides the tools, how many clients she has, whether she’s paid for time or for results. Most “my cleaning lady” arrangements are Scenario A with a 1099 stapled on top — which is exactly the misclassification problem.

The gray zones, honestly labeled

• The nanny with two families (not a share): working part-time for two unrelated families doesn’t make her a contractor to either. Each family applies the control test separately — and both will usually find “employee.”
• The occasional babysitter: the IRS’s casual-babysitting framing aside, a regular weekly sitter on your schedule trends employee; a teenager you call irregularly for date nights is the classic non-employee example. Frequency and control are the axes.
• Senior caregivers and household managers: same test, same result in most cases — if they work in your home on your schedule under your direction, they’re employees. The job title doesn’t change the analysis.

The quick self-test

Ask these five questions about the worker. Four or five “yes” answers means employee under the common-law test in the overwhelming majority of cases:

1. Do you set the schedule (days, hours, start/end times)?
2. Do you direct how the work is done (routines, methods, household rules)?
3. Does the work happen in your home with your tools and supplies?
4. Is she paid by the hour/week rather than by the job?
5. Does she work only (or overwhelmingly) for your family, on an ongoing basis?

A nanny in a typical arrangement answers yes to all five. A true independent cleaner answers no to most of them.

The state-law wrinkle

The IRS test above governs federal taxes, but states apply their own tests for unemployment insurance and workers’ comp — and some are stricter. Several states use an “ABC test” (notably California’s, adopted for many employment-law purposes), under which a worker is an employee unless (A) she’s free from your control, (B) she performs work outside your usual course of business, and (C) she’s independently established in that trade. A nanny fails prong B immediately — childcare in your home is not “outside” anything; it is the engagement. The practical upshot: if she’s an employee federally, assume she’s an employee for state purposes too, and register accordingly. If the federal test is genuinely ambiguous, the state test rarely saves you.

What to do instead of the contractor shortcut

1. Classify correctly using the test above. When in doubt, the IRS offers Form SS-8 (determination of worker status) — slow, but definitive.
2. Get an EIN (free, minutes on irs.gov) and set up household payroll — through a payroll service, not DIY.
3. File Schedule H with your Form 1040 annually, plus quarterly state filings and a W-2 for the employee.
4. Put it in the work agreement — “employee” in writing, with gross pay stated.

The contractor shortcut saves roughly $50/month in payroll service fees and risks five-figure liability. It’s the worst trade in household finance.

This page summarizes federal tax principles in general terms and is not tax or legal advice. Worker classification also has state-law dimensions — when the facts are ambiguous, consult a tax professional before choosing.