Taking a close look at a pay stub can leave both household employers and staff asking the exact same question: Where did that money actually go?
When you see money taken from your check for different things, it can feel frustrating.
But those deductions directly fund essential safety nets, healthcare coverage, and your retirement security.
Whether you manage a household staff or work as an employee, understanding how payroll deductions function protects your financial well-being and ensures full tax compliance.
What Are Payroll Taxes?
Payroll taxes are calculated as a direct percentage of an employee’s gross wages. Governed by federal, state, and local regulations, these funds support public benefit programs ranging from retirement to state disability and unemployment funds.
Unlike standard income tax withholdings (which depend entirely on personal tax-bracket calculations), payroll taxes are mandatory liabilities split between employee deductions and direct employer payments.
FICA: The Core Payroll Tax
When people mention “nanny taxes” or general payroll withholdings, they typically mean FICA, the Federal Insurance Contributions Act. FICA funds two essential programs: Social Security and Medicare.
Under statutory guidelines, FICA totals 15.3% of gross wages and is evenly split:
- Employee Contribution: 7.65% withheld directly from the paycheck.
- Employer Contribution: 7.65% paid out-of-pocket by the employer.
Note for Independent Contractors: Self-employed workers do not have an employer to cover the matching 7.65%, so they are responsible for the full 15.3% Self-Employment Contributions Act tax.
Proper worker classification is essential to ensure employees receive the employer-funded benefits they are legally owed. Nannies are considered household employees.
Social Security vs. Medicare
While grouped together under FICA, these two taxes operate under distinct financial rules:
Social Security
Funds retirement pensions, disability insurance, and survivor benefits. The rate is 6.2% for the employee and 6.2% for the employer (12.4% total). In 2026, this tax applies only to the first $184,500 of earned income. Once an employee’s earnings cross this threshold, Social Security deductions stop for the rest of the calendar year.
Medicare
Secures hospital insurance and healthcare coverage for seniors (age 65 and older) and eligible disabled individuals. The rate is 1.45% for the employee and 1.45% for the employer (2.9% total). Unlike Social Security, Medicare tax has no wage cap and applies to all gross earnings.
Why On-the-Books Payroll Matters for Workers
Reporting wages legally safeguards your future financial foundation.
- Social Security: To become eligible for Social Security retirement and disability benefits, workers must pay taxes into it. Under-the-table pay deprives workers of this, leaving them without a safety net later in life.
- Monthly Benefit Calculations: The Social Security Administration calculates future retirement payouts using a formula based on an individual’s highest-earning years. Off-the-books earnings are recorded as zero-income years, permanently lowering monthly retirement checks.
- Verifiable Proof of Income: Whether you’re applying for a mortgage, auto loan, or apartment lease, banks require clear, verifiable proof of income before extending credit. Being paid off the books makes it difficult to prove your ability to meet monthly payments, regardless of actual earnings.
Unemployment Taxes
Beyond FICA, employers contribute to federal and state unemployment programs that help workers during temporary job transitions.
FUTA (Federal Unemployment Tax Act)
An employer-only tax that funds administrative safety nets nationwide. FUTA is never deducted from employee paychecks. Employers pay 6% on the first $7,000 in gross wages for a maximum contribution of $420. FUTA taxes can be reduced for employers through a standard tax credit of up to 5.4% for paying state unemployment insurance taxes in full and on time.
SUTA (State Unemployment Tax Act)
State-level employer contributions that fund temporary unemployment compensation. Rates vary by state and individual employer claims history, but can range from a few hundred dollars to a few thousand dollars annually.
Disability Insurance
State Disability Insurance (SDI) programs provide short-term wage replacement to workers who suffer non-work-related illnesses or injuries, including pregnancy-related disability. Depending on the state, disability coverage is either funded entirely by a small employee paycheck deduction, paid by the employer, or shared between both parties. For household employers, maintaining required disability coverage ensures staff are financially protected during unexpected health leaves while keeping the employer fully compliant with state labor mandates.
Paid Family and Medical Leave
Paid Family and Medical Leave (PFML) is a state-administered program that allows employees to take job-protected, paid time off for major life events such as bonding with a new child, caring for a seriously ill family member, or handling military deployment needs. Funded through modest employee payroll withholdings (and in some states, employer contributions), PFML guarantees that household workers can take essential leave without sacrificing their livelihood or financial stability.
Streamline Your Payroll Compliance
Managing tax thresholds, remitting quarterly payments, and staying compliant with state and federal wage laws requires accuracy and care.
At GTM, we take the guesswork out of household payroll. From automatic tax withholdings and direct deposit to year-end W-2 filings, our comprehensive payroll solutions ensure employers remain compliant while staff receive every benefit they’ve earned. Call us today at (800) 929-9213 for a complimentary, no-obligation consultation with a household employment expert.
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