Does My Nanny Qualify for Unemployment? Understanding FUTA for Household Employers

FUTA, the Federal Unemployment Tax Act, is a federal tax you owe to the IRS on your nanny's wages. You owe it once you pay her $1,000 or more in any calendar quarter, on the first $7,000 you pay her each year. The rate is 6%. A credit can bring your effective rate down to 0.6%, but that credit is not automatic. You report and pay FUTA through Form 940, due January 31 for the previous tax year. Whether your nanny can collect unemployment if the job ends depends on your state's unemployment insurance system.

FUTA threshold for nanny wages: $1,000 per quarter

FUTA, the Federal Unemployment Tax Act, applies to your nanny's wages once you pay her $1,000 or more in a single calendar quarter of the current or previous year. Reaching that amount in any one quarter makes you responsible for the tax that year.

The $1,000 threshold applies fresh each quarter. If you pay her $900 in one quarter and $1,100 in the next, you owe FUTA starting with the second quarter. A lower amount in an earlier quarter does not cancel out a higher amount later.

This quarterly threshold is different from the $3,000 annual threshold that determines whether you owe Social Security and Medicare (FICA) taxes on her wages. The two thresholds work independently. You can cross one without crossing the other in a given year.

FUTA tax rate: 6%, with a credit to 0.6% for eligible employers

You owe FUTA at a 6% rate on the first $7,000 you pay your nanny each year, which comes to $420. Most employers, including household employers, who pay their state unemployment tax (SUTA) in full and on time can claim a credit of up to 5.4% against that liability, bringing the effective rate as low as 0.6%, or $42 on the same $7,000.

The credit is not automatic. You qualify only if you pay your SUTA in full and on time, and your state is not currently on the federal credit-reduction list. Confirm your state's status before assuming the lower rate applies to you.

Form 940 deadline: January 31

As a household employer paying FUTA, you file IRS Form 940, Employer's Annual Federal Unemployment Tax Return, once a year by January 31, to report the FUTA tax you owe on wages you paid to your nanny.

Form 940 covers the full tax year, and it covers every quarter you passed the $1,000 threshold.

FUTA vs. state unemployment tax (SUTA)

FUTA and SUTA are two separate taxes. Paying one does not satisfy the other.

FUTA is a federal tax, and you pay all of it yourself. Unlike Social Security and Medicare taxes, your nanny does not share any part of the FUTA cost.

Most states also require household employers to register separately for state unemployment insurance, often called SUTA, and to pay a state tax on top of FUTA. SUTA rules, rates, and registration steps vary by state.

Paying FUTA does not register you for your state's unemployment insurance program. That separate registration determines whether your nanny is in the system that could later pay her unemployment benefits.

SurePayroll and household FUTA/SUTA filing

Once you know you owe FUTA on your nanny's wages, the next question is who calculates and files it.

SurePayroll® By Paychex calculates and files your federal FUTA return, Form 940, once you set up the household plan. If you are a first-time employer, SurePayroll also helps you register for a state tax ID.

Registering your state unemployment insurance account is different. You complete that step yourself, with your state. Once your account is open, SurePayroll files your your ongoing state unemployment filings.

Can your nanny collect unemployment?

Whether your nanny can collect unemployment if the job ends depends on two things: whether you registered for state unemployment tax and reported her wages, and your state's eligibility rules for the reason the job ended. This article provides general information, not a determination of her eligibility for benefits.

Paying FUTA does not decide this question. If you have registered for state unemployment tax and reported her wages, she is in the system her state uses to evaluate a claim. Whether she qualifies, and for how much, depends on her state's rules.

What to do next

With your FUTA obligation clear, decide how you want to manage the filing itself: the federal Form 940 and any state unemployment filing your state requires.

If you have not set up the SurePayroll household plan yet, get started today.