Figures checked against IRS Publication 926 (2026 edition) and the 2026 General Instructions for Forms W-2 and W-3 on September 30, 2026. General information, not tax or legal advice.

If you run an agency, this question lands on your desk the week a placement closes: "Which payroll service should we use?" It depends on how much the family wants to do themselves, which is not a satisfying answer to give over the phone, so I wrote down the version I would hand them and let them work it out at their own kitchen table.

Danny has already run two pieces here on where payroll services fit and how to talk to families about legal pay. This one takes the next question: once a family knows they need a service, how do they tell two of them apart?

Once the nanny starts, the family is the employer

The agency found the nanny, but the family is the one employing them, and the IRS puts the test in one sentence:

"The worker is your employee if you can control not only what work is done, but how it is done." And on agencies: "If the worker is your employee, it doesn't matter whether the work is full time or part time, or that you hired the worker through an agency or from a list provided by an agency or association." IRS Publication 926, Household Employer's Tax Guide, 2026 edition, "Do You Have a Household Employee?"

The one exception is an agency that employs its own caregivers and runs their payroll, which is a different model and not what most families walk away from a placement with.

Being the employer puts a few things on the calendar. Social Security and Medicare taxes apply once a family pays a nanny $3,000 or more in cash wages during 2026, which means 6.2% and 1.45% withheld from the nanny and the same 7.65% paid by the family on top. Federal unemployment tax applies once the household pays $1,000 or more in any calendar quarter this year or last. At $20 an hour for 40 hours a week, the $3,000 line is crossed in the fourth week, so for nearly every family you place the question is which service to use, not whether they need one.

Then there are two documents to produce at the end of the year. The nanny gets a W-2, and for 2026 wages the family has to give it to them and send Copy A, with the W-3 transmittal, to the Social Security Administration by February 1, 2027 (January 31 is a Sunday that year). Schedule H goes in with the family's own 2026 income tax return, due April 15, 2027. Whatever the state requires sits on top of that.

If a family wants to see the actual dollars before they pick anything, the free nanny tax calculator shows the employer taxes on top of a given wage.

Who files is the first thing to compare

Two services can both say "we handle your taxes" and mean quite different things by it. One does every calculation, prepares every form and hands them to the family to submit. The other files on the family's behalf, and for that the family signs an authorization so the service can act as their agent; the IRS calls it a reporting agent authorization, Form 8655, and some services also ask for a power of attorney over the family's tax accounts.

Neither is wrong, but the difference matters on the day something goes sideways, for a reason the IRS states plainly:

"Generally, as an employer, you're responsible to ensure that tax returns are filed and deposits and payments are made, even if you contract with a third party to perform these acts. You remain responsible if the third party fails to perform any required action." IRS Publication 926, 2026 edition, "Outsourcing payroll duties"

Household taxes are reported on Schedule H under the family's own Social Security number, so the IRS holds the family responsible for the numbers no matter who pressed submit, and every full-service accuracy guarantee I've read reimburses a penalty when the error was the service's, never the tax itself. This is where my own view comes in. I built NannyKeeper on the first model on purpose, because when a family files themselves they see every number before it goes in and catch a mistake before it's submitted rather than after a notice arrives, and in practice that is about 15 minutes a quarter. Full service moves the clicking off the family's plate, and for some families that is exactly what they're paying for, but it doesn't move the responsibility, and I'd rather they knew that before they sign. So the first thing to compare is not price but who submits, and what the family still has to do each quarter and each January. I keep a running list of what a nanny payroll service should handle, and what stays yours if a family wants the long version.

How the pricing is shaped

Prices move around, so I won't list any here, but the shapes are stable enough to describe. Some services charge a flat monthly or annual fee. Some add a charge per nanny, which matters for a family that also employs a housekeeper. Some charge a setup fee, a separate year-end fee for the W-2 and Schedule H, or a fee per direct deposit transfer, and a low monthly price with a year-end charge and a per-transfer fee can land higher over a year than a flat one. The number worth asking for is the full-year cost for this family's actual situation, with the people they pay and how often.

Direct deposit costs money and lead time

Ask what direct deposit costs and how far ahead payroll has to be approved for the money to land on payday, because that lead time is what decides whether a nanny ever gets paid late. Some services only record a payment the family makes by check or app, which suits some households fine and costs nothing extra.

At year-end, every service I know of produces the W-2 and Schedule H. The question again is who files: does the service send Copy A to the SSA, or hand the family a PDF and tell them where to upload it?

State registration, contracts and hours

Publication 926 tells a family to contact their state unemployment tax agency to find out whether they need to pay state unemployment tax for their nanny. Some payroll services register on the family's behalf and some walk them through it, and a few assume it is already done and never ask, so it is worth asking which. The state-by-state nanny tax guides cover what each state expects.

Two things that are not payroll but sit right next to it: a written work agreement and a way to log hours. Agencies often provide the contract, and the family will be glad of it. On hours, the Fair Labor Standards Act already requires the employer to keep a record of hours worked each workday and each workweek, so ask whether the nanny can record their own hours in a way that feeds into pay, rather than someone reconstructing them from memory in January. A free nanny time tracker works for that even before a family has picked a payroll service.

Leaving mid-year is the case nobody asks about

Families switch services, or stop needing a nanny in June, and almost nobody asks what happens then. Will the service issue the W-2 for the months it ran payroll, or does the family carry those wages into whatever comes next?

On late filings, the IRS says you may owe a penalty for each Form W-2 filed late, and because of the "you remain responsible" rule above, the IRS holds the family accountable for it whoever pressed submit. So ask what a service's guarantee actually covers: a penalty caused by the service's own error, one caused by the family approving payroll late, or only a refund of the fee.

None of this tells a family which service to pick, and a service that answers all ten clearly is probably one they can live with. There is a side-by-side look at best nanny payroll services if they want one, and I would rather a family read it and choose someone else than sign up anywhere without knowing who files.