Why the hourly rate is roughly two-thirds of the story
Daycare is a service you buy. A nanny is a person you employ, and employment carries obligations that never appear in the rate you negotiate.
Overtime is the first surprise. Live-out domestic service workers are covered by the Fair Labor Standards Act, which means every hour beyond forty in a week is paid at one and a half times the regular rate. A 45-hour schedule at $25 an hour is not 45 × 25 = $1,125 a week; it is 40 × 25 + 5 × 37.50 = $1,187.50. Over a year that difference is $3,250, and it is not negotiable — the FLSA does not permit an employee to waive it.
Employer payroll taxes are the second. IRS Publication 926 makes you a household employer once you pay a worker more than an annually-set cash-wage threshold. You then owe the employer half of Social Security (6.2%) and Medicare (1.45%), plus federal unemployment tax and whatever your state charges. The employee owes their own 7.65% from their pay, which is why a "net rate" agreement is a trap: you end up paying both halves plus grossing up the wage.
The administration is the third. Quarterly estimated payments, a W-2 at year end, Schedule H with your own return, state unemployment registration and reporting, and in many states a workers' compensation policy. A household payroll service does all of it for a few hundred dollars a year, which is cheap against the penalties for getting it wrong.
What makes the comparison interesting is the shape. A nanny costs the same for one child or three — the caregiver's hours do not change. Daycare charges per child. So the two lines cross at a specific number of children, and that crossover is the single most useful output on this page.
Building the gross, then the loading, then the crossover
Start with the weekly gross. Split the schedule at forty: regular hours at the agreed rate, overtime hours at 1.5 times it. This is the step most household budgets skip, and it is the largest single error in a nanny estimate.
Annualise it, treating paid leave separately. Guaranteed paid time off is weeks the nanny does not work but is paid for, so those weeks carry no overtime — they are paid at straight time for the regular hours. If you employ someone for 52 weeks with 2 weeks of paid leave, that is 50 worked weeks at the full weekly gross plus 2 weeks at 40 × the rate. Add any bonus, which is wages and is taxed.
Apply the employer loading. Multiply the gross by the FICA rate — 7.65% is the employer share, 6.2% Social Security plus 1.45% Medicare — and by your combined unemployment rate. This calculator applies the unemployment rate to the whole wage as a simplification, and it is a conservative one: FUTA is 6.0% on only the first $7,000 of wages, and most employers take the full 5.4% state credit, leaving 0.6% of $7,000 = $42. State unemployment insurance rates and wage bases vary far too much to hard-code, so the default of 1.5% is a placeholder for you to replace with your state's figure.
Add the fixed costs. Payroll service and reimbursed expenses do not scale with hours. They are typically 2–3% of the total and are the easiest part to forget.
Then find the crossover. Divide the all-in nanny cost by the daycare cost for one child. That gives the number of children at which the two are equal. Below it, daycare wins; above it, the nanny does. Because you cannot have a fractional child, round up: a break-even of 4.12 means five children, which is a way of saying the nanny is not close at these rates.
Worked example: 45 hours a week at $25, against two daycare places
Take the defaults: $25 an hour for 45 hours a week, 52 weeks with 2 weeks of paid leave, a $500 bonus, 7.65% FICA, 1.5% unemployment, $600 of payroll service and $800 of expenses; two children, daycare at $15,000 each.
- Weekly gross. 40 × $25 = $1,000, plus 5 × $37.50 = $187.50. Total $1,187.50.
- Worked weeks. 52 − 2 = 50, at $1,187.50 = $59,375.
- Paid leave. 2 weeks × 40 h × $25 = $2,000, at straight time because no work is performed.
- Gross wages. 59,375 + 2,000 + 500 bonus = $61,875.
- Employer FICA. 61,875 × 7.65% = $4,733.44.
- Unemployment tax. 61,875 × 1.5% = $928.13. Employer taxes total $5,661.56.
- All-in nanny cost. 61,875 + 5,661.56 + 600 + 800 = $68,936.56. That is 11.4% above the gross wage, and 68,936.56 ÷ 58,500 = 17.8% above the naive 45 × 25 × 52 = $58,500 that most families first calculate.
- Daycare. 2 × $15,000 = $30,000.
- Verdict. Daycare is cheaper by $38,937 for two children.
- Break-even. 68,936.56 ÷ 15,000 = 4.60 children. You would need five children in care before the nanny wins at these rates.
Now change one number: a nanny share with a second family. The all-in cost is unchanged at $68,936.56, but your share is half of it — $34,468 — against $30,000 for two daycare places. Still not cheaper, but close enough that the non-financial factors decide. Halve the daycare figure instead, to $7,500 per child in a lower-cost market, and the break-even rises to 9.19 children, which is another way of saying a nanny is simply a different product at that price point.
Reading the crossover, and what the money does not capture
The break-even figure is the number to remember. It answers the question directly: how many children would you need in care for a nanny to be the cheaper option? At the defaults it is 4.60, which is decisive. In a high-cost market where infant care runs above $25,000 a year, the same nanny breaks even at 2.76 children — meaning three children makes a nanny cheaper, and two makes it a near-run thing.
Look at infant rates specifically. Centres charge substantially more for infant rooms than for toddler or preschool rooms, because state licensing sets tighter staff-to-child ratios for babies. A family with a newborn and a three-year-old should not use one average rate for both; run the calculation with the actual rate for each room and add them.
A nanny share is the middle option and it changes the arithmetic more than anything else. Halving the cost while keeping one caregiver is the only lever on this page that moves the nanny side by tens of thousands. The complications are real: one family must be the employer of record, the schedule has to suit both households, and the arrangement ends if either family moves. Put all of it in writing before it starts.
Do not forget the tax credits, which this page deliberately excludes. A Dependent Care FSA lets you pay for qualifying care with pre-tax dollars, and the federal Child and Dependent Care Credit offsets a percentage of qualifying expenses. Both apply to a nanny and to daycare, provided the nanny is paid on the books — which is one more reason not to pay cash. Because they apply to both sides, they shrink the absolute difference without usually changing which option is cheaper.
Weigh the things the money does not measure. A nanny covers a sick child, a snow day and a centre closure, which for two working parents is worth real money in lost leave. A centre never calls in sick itself, gives children a peer group, and carries no employment risk. Cost is one input to this decision; for most families it is not the deciding one at two children.
Sanity-check the hours before the rate. Overtime hours are 50% more expensive than regular ones, so the schedule matters more than the negotiation. Reducing a 50-hour week to 45 saves five overtime hours at $37.50 — $9,375 a year at 50 worked weeks — which is larger than any realistic movement in the hourly rate.
What a nanny costs all in, by rate and scheduled hours
| Hourly rate | 40 h/week | 45 h/week | 50 h/week | 55 h/week |
|---|---|---|---|---|
| $18 | $42,266 | $49,633 | $57,001 | $64,374 |
| $22 | $51,352 | $60,352 | $69,357 | $78,362 |
| $25 | $58,158 | $68,391 | $78,624 | $88,856 |
| $28 | $64,969 | $76,430 | $87,890 | $99,351 |
| $32 | $74,050 | $87,148 | $100,246 | $113,344 |
| $38 | $87,677 | $103,225 | $118,781 | $134,334 |
Each five hours added to the week costs 5 × 1.5 × rate × 50 weeks, loaded by 9.15% of employer tax. At $25 that is $9,375 of wages and $10,233 all in — which is why the schedule is a bigger lever than the rate.
What being a household employer actually requires
IRS Publication 926, Household Employer's Tax Guide, is the governing document and it is short enough to read in full. It sets an annual cash-wage threshold above which you owe Social Security and Medicare on a household worker's pay, another threshold for federal unemployment tax, and it tells you to report all of it on Schedule H with your own Form 1040. You issue the worker a W-2 and file a W-3 with the Social Security Administration.
Separately, the Fair Labor Standards Act requires minimum wage and overtime for live-out domestic service workers, and the 2013 amendments extended those protections to most home care workers employed by third parties. Live-in workers are exempt from the federal overtime provision but not from minimum wage, and several states require overtime for them anyway. State law also governs unemployment insurance registration, workers' compensation, paid sick leave and — in a growing number of jurisdictions — written contracts under a domestic workers' bill of rights.
The thresholds and rates change annually. Check the current edition of Publication 926 and your own state's labour department rather than relying on any figure quoted here.
Mistakes that make a nanny look cheaper than it is
- Pricing 45 hours as 45 × the rate. Five of them are overtime at 1.5×. This alone is thousands of dollars a year.
- Agreeing a net rate. "$800 a week in hand" makes you liable for the employee's tax as well as your own, and the gross-up is larger than most families expect.
- Forgetting employer taxes entirely. 7.65% FICA plus unemployment is roughly a 9% loading on every dollar of wage.
- Paying cash. It disqualifies you from the Dependent Care FSA and the child care tax credit, exposes you to back taxes and penalties, and leaves the nanny with no Social Security credit or unemployment eligibility.
- Using one average daycare rate for an infant and a preschooler. Infant rooms cost substantially more because licensed ratios are tighter. Price each room separately.
- Ignoring guaranteed hours. Most nanny contracts guarantee the scheduled hours whether or not the family needs them, so a week you take off is still a week you pay for.
- Leaving out the cost of your own time. Without a payroll service, expect several hours a quarter on filings, and the penalties for errors are yours.
- Comparing a nanny's flat cost against daycare without the crossover. The two lines have different slopes. Always look at the break-even child count, not just today's total.
Where this fits among the other childcare arithmetic
This calculator compares two full-time arrangements. It does not price the hybrid options families actually end up with — part-time daycare plus a grandparent, a preschool morning plus an afternoon sitter, or an au pair, which has its own visa, stipend and education-allowance rules and is not simply a cheaper nanny.
For occasional and evening care, the babysitter pay calculator handles the different structure of an hourly casual arrangement, where the household-employer thresholds usually are not reached. For the broader budget question, the childcare cost calculator works from weekly rates and weeks of care without the employer-tax layer, which is the right tool when you are only comparing centres.
Childcare rarely arrives alone. The diaper cost calculator and the baby formula cost calculator cover the two consumables that dominate the first two years, and the grocery budget per person calculator handles the household total that all of it sits inside. If a nanny's duties would include housekeeping, price that separately with the house cleaning cost calculator — and note that time spent cleaning is still compensable hours under the FLSA, so it does not come free with the childcare.
One caution about scope. Everything here is framed around United States law: IRS Publication 926, the Fair Labor Standards Act and state unemployment insurance. If you are employing a nanny elsewhere, the structure of the calculation carries over — gross, statutory employer contributions, administration — but every rate and threshold will be different, and in many countries the employer contribution is several times the US figure.