The Payroll Blog

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Nanny Payroll Part 3: Unemployment Taxes

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Good news: If you’ve figured out that you owe nanny taxes and you have your Social Security and Medicare nanny taxes squared away, you’re almost done collecting the nanny taxes you need to send off to Uncle Sam.

But we wrote "almost done" for a reason. If your nanny makes $1,000 or more in any quarter of 2018, you'll have to add federal unemployment taxes (often called FUTA) to the list of taxes you're responsible for.

Like Social Security and Medicare taxes, the IRS grants a few exceptions. If your nanny is:

  • One of your parents
  • Your spouse
  • One of your children under 21

Then you're in luck — you don't owe FUTA. If your nanny falls outside these exceptions, you'll need to make FUTA payments and complete the proper paperwork.

FUTA is only collected on your nanny's first $7,000 of wages. The FUTA tax rate is 6 percent, although many employers get a 5.4 percent credit against the FUTA tax. Unlike Social Security and Medicare, you cover the full cost of this tax, but the cost is substantially less to you than those taxes. If you handle FUTA taxes yourself instead of using us to manage your nanny's FUTA taxes, don't forget to stop setting aside funds once your nanny earns $7,000, or you'll end up wasting considerable time and money.

The IRS gives two options for paying and filing FUTA: If you or your spouse don't own a business, you'll include a Schedule H with your annual personal income tax returns. If you or your spouse own a business, you can add your nanny's FUTA taxes to one of the following tax forms:

  • Form 941, Employer's Quarterly Federal Tax Return
  • Form 944, Employer's Annual Federal Tax Return

Whether you fill out Form 941 or Form 944, you'll also add your nanny to Form 940, Employer's Annual Federal Unemployment (FUTA) tax return. Each form will include instructions about where and when to send payments.

Changes to FUTA

Certain states have been identified as "credit reduction" states by the Department of Labor. What this means, in a nutshell, is that if you're in one of these states you may have to pay additional FUTA taxes when filing Form 940. This is because your state has not repaid money to the federal government lent to the state for unemployment benefits.

Now that you've verified you owe nanny taxes, have the steps down pat for paying and filing nanny Social Security and Medicare taxes, and know the ins and outs of FUTA payments, there's only one step left: federal income taxes.

We cover that in Nanny Payroll Part 4: Federal Income Taxes. For the final piece of the nanny payroll puzzle.