FUI taxes are not something the average taxpayer has to worry about. It's a federal unemployment tax and only employers are responsible for paying it. It's not a deduction from your paycheck, and you don't have to contribute to it if you're self-employed. You may have to deal with it if you pay household help, however.
You only have to pay FUI tax for employees, but figuring out if someone who works for you is an employee can be tricky. If you pay someone to mow your lawn, babysit, or wash your car periodically, he's probably an independent contractor, not an employee. He may provide services for others in the same capacity, and he controls how and when he does the work. An employee is someone whose work and work hours you control. You tell him when to report for duty and what he's responsible for doing after he arrives. If the person who babysits your children does so every day so you can go to work and if you set his hours, he's probably an employee. If you're a sole proprietor and you hire someone to help out with your business, even on occasion, he's probably an employee as well if you determine the hours he works and what he does for you.
Calculating FUI tax isn't a simple equation, but the Internal Revenue Service provides Form 940 to help you determine what you owe. The tax is due on the first $7,000 you pay your employee per year, but only after you pay him more than $1,000 in any given quarter. This is the triggering event that makes you liable. After his pay crosses the $7,000 threshold, you don't have to pay FUI tax on the balance of his wages for that year. The rate is 6 percent as of 2013, so you would owe the IRS $420. There's a catch, however. If more than one person works for you, they all contribute to the $1,000 threshold. For example, if you have three employees and you pay them each $350 in a single week, or if you have one employee who earns $350 a week for three weeks, you're liable for FUI taxes. The $7,000 in earnings, however, applies to each of your employees individually.
The IRS offers a credit that allows you to whittle the $420 FUI tax for each employee down to $42. If you owe FUI, you're probably also liable for state unemployment taxes. If you make your state tax payments on time – typically by April of the following year – you can claim the FUI credit equal to 5.4 percent of each employee's first $7,000 in earnings, or $378. The credit applies directly to your FUI tax bill, so you would only owe $42 for each employee.
A few people are exempt from FUI taxes, at least if they provide you with household labor. You're not liable for this tax if you pay your children, your parent or your spouse to do work for you. Your children must be under 21, however.
- Vermont Agency of Commerce & Community Development: Federal Unemployment Insurance Tax (FUTA)
- IRS: Federal Unemployment Tax
- Stout, Stuart, McGowen & King: The "Nanny Tax" Rules – What to Do if You Have Household Employees
- IRS: Self-Employment Tax (Social Security and Medicare Taxes)
- IRS. "Topic No. 756 Employment Taxes for Household Employees." Accessed Oct. 23, 2020.
- IRS. "Publication 926 (2020), Household Employer's Tax Guide." Accessed Jan. 30, 2020.
- IRS. "Hiring Household Employees." Accessed Oct. 23, 2020.
- Social Security Administration. "Fact Sheet: 2021 Social Security Changes," Page 1. Accessed Oct. 23, 2020.
- IRS. "Topic No. 759 Form 940 – Employer's Annual Federal Unemployment (FUTA) Tax Return – Filing and Deposit Requirements." Accessed Oct. 23, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.