If your agency agreement never says who the nanny's employer is, a state auditor or an unemployment-insurance investigator may answer that question for you — and their answer comes with back payroll taxes, penalties, and interest. Getting the employer question right is the single highest-stakes bookkeeping decision a nanny placement agency makes, because it determines whose books carry wages, payroll taxes, and workers' compensation. Everything else — placement fees, replacement guarantees, background-check costs — flows from that one determination.
This guide walks through the referral model most agencies run on, how to structure and recognize placement-fee revenue, how to account for replacement guarantees before they eat your margin, what background screening really costs, the household-employer conversation you owe every family, and the five numbers that tell you whether your agency is actually profitable.
The Referral Model: Why the Family (Not You) Is the Employer
Most nanny placement agencies operate as referral services: you recruit, vet, and introduce caregivers, the family hires the nanny, and the family becomes the employer of record. Your client agreement should say so explicitly — many agencies include a clause stating the client family is the sole employer of the nanny and that the agency is only a referral service. That sentence protects you, and it also tells your bookkeeper something critical: nanny wages never touch your profit and loss statement.
Some states effectively require the disclosure. California law provides that an employment agency referring a domestic worker is not the worker's employer when specific conditions are met, and it requires the agency to tell the family — orally before the referral and in writing within three business days after — that the agency is not the employer and that directing the worker's day-to-day tasks may create employer responsibilities including employment taxes and workers' compensation. Build that notice into your placement packet so no placement ever ships without it.
The alternative — the employer or staffing model — flips your books entirely. If families pay you for the nanny's hours and you pay the nanny, you are running payroll: withholding, employer FICA, federal and state unemployment insurance, workers' compensation, W-2s, and in some states a different license category. Temporary and backup-care divisions sometimes work this way. If yours does, keep it in a separate division or entity with its own payroll accounts, because mixing referral revenue and staffing payroll in one ledger makes both halves unreadable.
One classification never works: treating placed nannies as independent contractors. A nanny whose schedule, duties, and methods the family controls is a household employee under federal law, not a 1099 contractor. Agencies that suggest otherwise to families inherit the fallout when the misclassification surfaces.
How Placement Fees Work — and When You've Actually Earned Them
Industry placement fees typically land between 12 and 20 percent of the nanny's expected first-year compensation, often with a minimum fee (commonly around $4,000 to $4,500) that protects you on part-time placements. Some agencies tier their pricing: a basic package near 15 percent with a short replacement window, and a premium package at 20 percent or more with a longer guarantee and post-placement support. Whatever your schedule, your client agreement must spell out the fee, when it is due, and the refund and replacement policy — the International Nanny Association's recommended practices for placement agencies call for all three in writing, plus a description of the family-caregiver employment relationship.
For your books, split what you collect into two buckets:
- Non-refundable retainers and search deposits. A family that pays $1,500 to start a search has bought work you have not performed yet. Book it as deferred revenue (a liability), and move it to earned revenue as you deliver milestones or complete the placement — not the day the check clears.
- Success fees due at placement. The balance, typically due when the family and nanny sign an intent-to-hire or work agreement, is earned when the placement is made. That is your revenue event.
Recognizing the full fee as revenue while the replacement guarantee is still alive overstates your income. Which brings us to the liability most agencies forget to book.
Replacement Guarantees Are a Liability, Not a Footnote
The standard replacement window runs 60 to 90 days from the start date, with some agencies extending to six months on premium packages: if the placement fails inside the window, you run a second search free or refund part of the fee. Every open guarantee is a contingent obligation. If your historical replacement rate is 10 percent and you placed $200,000 of fees last quarter, roughly $20,000 of that revenue is haunted — you will spend it on free re-searches or send it back as refunds.
Handle it the way any business with warranties does:
- Track your replacement rate. Replacements granted divided by placements made, measured monthly and trailing-twelve-month. This is your most important quality metric and the input to everything below.
- Book a refund reserve. At each month-end, accrue a liability equal to your replacement rate times the fees still inside their guarantee windows. Debit refund expense (or contra-revenue), credit a refund-reserve liability. When a guarantee expires unclaimed, release it to income; when you pay a refund, charge it against the reserve instead of taking a surprise hit.
- Cost the free re-search. A replacement search consumes recruiter hours, job-board postings, and a second background check. Log those hours and hard costs against the original placement so you learn what a failed placement truly costs — usually far more than the refund alone.
Agencies that skip the reserve look more profitable than they are right up until a bad month of early quits turns a quarter upside down. The reserve smooths that out and tells you the truth in real time.
Background Checks: Your Biggest Per-Placement Cost
Screening is the largest hard cost inside every placement, and it arrives before you have earned a dollar of the fee. A competent check — commercial criminal package plus sex-offender registry, identity and Social Security trace, motor-vehicle records for driving nannies, and fingerprint-based checks where available — typically costs $80 to $200 per candidate, more in states with registry programs like California's TrustLine. Run three finalists through full screening and you have spent up to $600 against a placement that may or may not close.
Three bookkeeping and compliance rules keep this cost under control:
- Decide who pays, in writing, before you screen. Some agencies absorb screening into the placement fee; others charge the family a separate, non-refundable screening fee or pass the vendor invoice through at cost. Any of these works — what fails is screening first and negotiating later. Pass-through charges collected from families are not revenue; run them through a clearing account so they never inflate your top line.
- Follow the Fair Credit Reporting Act every time. When you use a consumer reporting agency, federal law requires a standalone written disclosure, the candidate's written authorization, and a two-step adverse-action process (pre-adverse-action notice with a copy of the report, then final notice) before you reject a candidate based on the results. Build the FCRA packet into your recruiter checklist — a skipped disclosure can cost far more than the hire was worth.
- Track screening as cost of placement, not overhead. Code every screening invoice to the placement (or the failed search) it belongs to. Your cost-per-placement metric is meaningless if screening spend sits in a general office-expense account.
The Household-Employer Talk You Must Have With Every Family
Here is the conversation that saves your clients from the most common and most expensive mistake in household employment: paying the nanny cash, off the books, with no taxes withheld. When a family hires your referred nanny, the family becomes a household employer with federal obligations most first-time parents have never heard of. You are not their tax advisor, but warning them — in writing, at placement — is both good service and self-protection, because families blindsided by the "nanny tax" blame the agency that never mentioned it.
The 2026 federal basics, from IRS guidance for household employers:
- Social Security and Medicare (FICA). Pay a household employee cash wages of $3,000 or more in 2026 and you must withhold the employee's 7.65 percent share and pay a matching 7.65 percent employer share. For a full-time nanny this threshold is always met.
- Federal unemployment tax (FUTA). Total cash wages to household employees of more than $1,000 in any calendar quarter — this year or last — triggers FUTA: 6 percent on the first $7,000 of each employee's wages, offset by a credit of up to 5.4 percent for state unemployment taxes paid, for a typical net rate of 0.6 percent.
- Reporting. The family files Schedule H with its Form 1040, furnishes the nanny a Form W-2, and needs its own employer identification number. State thresholds are often lower than the federal ones, so the family usually owes state unemployment and withholding registration from the very first paycheck.
Your agency's role is referral and documentation, not payroll: hand every family a one-page household-employer overview at placement, point them to a household payroll service, and require — as some agencies do — that placed nannies be paid as W-2 employees through payroll. Keep a signed copy of the overview in the placement file. If a wage dispute or audit ever reaches back toward your agency, that file proves you told them.
Licenses, Insurance, and the Paper Trail
Placement agencies sit at the intersection of employment-agency law, childcare regulation, and ordinary business licensing, and the requirements vary sharply by state:
- Employment-agency licenses. States including New York license employment agencies and restrict when fees may be charged to job seekers — know whether your state requires a license before you take your first client, and never charge caregiver-side fees where the law limits them.
- Childcare referral rules. California's TrustLine registry and related disclosure statutes impose specific duties on agencies referring child-care providers. Check your attorney general, department of labor, and business-licensing authority for the equivalent in every state where you place.
- Professional liability insurance. The INA recommends agencies carry professional liability coverage where obtainable. A negligent-referral allegation — a family claiming your screening missed something material — is the lawsuit most likely to find you, and a general-liability policy alone may not answer it.
- Written agreements everywhere. INA recommended practices call for a written agency-family agreement covering fees, refund and replacement terms, and services, plus encouragement that the family and caregiver sign their own work agreement covering duties, hours, wages, overtime, tax obligations, and benefits. Standardize both documents and file signed copies with each placement record.
Calendar every license renewal, insurance renewal, and filing deadline alongside your tax calendar. Lapsed credentials discovered mid-dispute are indefensible.
The Five Numbers That Tell You If Your Agency Is Healthy
Run these monthly. Together they distinguish a thriving agency from a busy one:
- Effective fee yield — collected placement revenue divided by placed annualized compensation. If your rate card says 17 percent but yield runs 14 percent, discounts, minimum-fee waivers, and refunds are leaking three points. Find them.
- Cost per placement — recruiter compensation, job boards, screening, and allocated overhead divided by placements closed. Compare it to your average fee; the gap is your gross margin per placement.
- Replacement rate — placements replaced or refunded within the guarantee window, as a share of placements. Rising replacement rates are a recruiting-quality or family-matching problem wearing a bookkeeping costume.
- Days to fill — search start to signed work agreement. Long fills burn recruiter capacity and push families toward competitors; segment it by full-time, part-time, and temporary.
- Retainer conversion — paid searches that become placed searches. If conversion sags, you are either taking unfillable searches or underpricing the retainer relative to the work.
A simple dashboard that charts these five series month over month — placement revenue, cost per placement, and guarantee exposure side by side — turns month-end from a scramble into a reading exercise. If you keep your books in plain text, generating those charts from your ledger is a script away; visualization tools like those on the Fava page show what that reporting layer can look like.
Simplify Your Financial Management
As you grow your placement volume, keeping recruiter costs, screening spend, deferred retainers, and guarantee reserves in clearly separated accounts is what lets those five numbers stay honest. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in. Get started for free and see why developers and finance professionals are switching to plain-text accounting.
