Hello,

Question about nanny taxes, specifically paying state and federal unemployment tax. Can anyone please help me understand this:

"Generally, you can take a credit against your FUTA tax for amounts you paid into state unemployment funds. The credit may be as much as 5.4% of FUTA taxable wages. If you are entitled to the maximum 5.4% credit, the FUTA tax rate after credit is 0.6%."

Does this mean that if I pay the nanny's state unemployment tax, I can take a credit against the federal unemployment tax and it will become less than 6%?

"Generally, you can take a credit against your FUTA tax for amounts you paid into state unemployment funds. The credit may be as much as 5.4% of FUTA taxable wages. If you are entitled to the maximum 5.4% credit, the FUTA tax rate after credit is 0.6%." =====>>Correct; the IRS is giving employers a break. States also have unemployment systems working alongside the federal system. Consequently the States have their own unemployment taxes. Employers end up paying into both systems. However, there’s a way to get credit for paying into the state. It’s called the FUTA credit, which decreases the amount of FUTA paid by .054%. It depends on how much unemployment tax was paid into a particular state system. FUTA tax can be reduced on IRS form 940 based on the amount paid in state taxes for unemployment

Does this mean that if I pay the nanny's state unemployment tax, I can take a credit against the federal unemployment tax and it will become less than 6%?=========>>>>>>Correct; nanny tax aims to collect FICA and FUTA taxes from those who employ home workers. The Nanny Taxes, payroll taxes, are a combination of Social Security and Medicare taxes as well as FUTA and State Unemployment taxes. Your nanny will pay a share of these taxes, through paycheck withholdings. As the employer, you are responsible for submitting all taxes ,even your nanny’s share, to the IRS and appropriate State tax agency. If you pay wages of $1k or more in any one quarter, then you owe unemployment taxes to the Federal and State Government. The FUTA starts at 6.0% of wages paid up to $7k. However, by paying your State Unemployment taxes your Federal rate is reduced down to 0.8% between January 1 and June 30, 2014. From July till the end of the year, the rate drops to 0.6%. The maximum FUTA you should pay is $56. If you don’t pay your State Unemployment taxes you could face an increased FUTA bill of up to $434. So, FUTA is 0.8% if you pay by April 15 of the following year. If you are behind on your FUTA payment, you actually have to pay a higher rate of 6.2%

Thanks for the response. Am I correct that if my state is a "credit reduction state", I don't get the credit against FUTA? Do I get any credit at all, or just some (not 5.4%)?

Thanks for the response! Am I correct that if my state is a "credit reduction state", I will not get the full 5.4% credit against the FUTA? Will I get any credit at all?

yes you will but it may be reduced,. Some states take loans from the Federal Unemployment Trust Fund as they lack the funds to pay unemployment insurance benefits for residents of their states. If a state has outstanding loan balances for two consecutive years, the FUTA credit rate for employers in that state will be reduced until the loan is repaid, ultimately requiring employers to pay additional unemployment tax when filing foprm 940 annual form I mean;Each 0.3 percent of a FUTA credit reduction represents an additional cost to employers of up to $21 for each employee; so aslongas you are not exempt then you may have to pay more FUTA tax on wages paid that are subject to the unemployment tax laws. For example, a 100 employee company subject to a 0.9% reduction, in which each employee makes a minimum of $7,000, will pay an additional $6.3k or $63.00 per employee.

Thanks! I looked, and as far as I understand, if your state is a credit reduction state, you pay 6% of the first $7000 of wages... So that's $420 max? No more than that?