Can an employer pay nannies on the payroll of their own business?
Nanny employers who are sole proprietors and have other business employees may chose to include their nanny's payroll in their 941, 943 or 944 tax returns. The 'nanny taxes' are exactly the same employment taxes paid for other employees and do not require special calculation. (See IRS Publication 926 page 8 for a discussion on paying the nanny taxes on your 941, 943 or 944 form.)
What the sole proprietor may not do is include the nanny's payroll and associated payroll taxes in their business tax deductions.
A nanny provides childcare and is a contributing member of a household, not the employer's business. The nanny employer/sole proprietor must make book keeping adjustments to their business records to assure that they do not take business deductions for the nanny's payroll and taxes. Similarly, the nanny is not included in Workers' Compensation insurance issued for business employees. Many employers who are sole proprietors find it is simply easier to completely separate their household payroll and tax reporting from that of the business.
Sole Proprietors who do not wish to co-mingle their household and business payroll may choose to report the nanny wages on Form 1040 Schedule H and would then remit the W-2 form at year end with a separate W-3 cover form.