If you employ a nanny, senior caregiver, or other household worker, it’s essential to stay informed about payroll tax obligations — especially the FUTA Credit Reduction, which can impact the amount of federal unemployment tax you owe. If you’re not familiar with this term, don’t worry. We’re here to explain what it means, how it works, and how it might affect your payroll in 2024.
The Federal Unemployment Tax Act (FUTA) requires employers — including household employers — to pay a federal payroll tax to support unemployment compensation programs. This tax applies if you pay a household employee $1,000 or more in any calendar quarter.
The standard FUTA tax rate is 6% on the first $7,000 of each employee's wages. However, employers typically receive a 5.4% credit, reducing the effective FUTA tax rate to 0.6%.
This credit is why many employers pay far less in FUTA tax than they might expect. But if your state is classified as a FUTA Credit Reduction State, your available credit is reduced, leading to higher tax payments.
A FUTA Credit Reduction State is a state that has borrowed funds from the federal government to pay unemployment benefits and has not repaid the loans on time. As a result, the federal government reduces the FUTA credit available to employers in that state. This effectively increases the FUTA tax rate for household employers in that state.
The increased tax liability can be frustrating for household employers because it is announced later in the year but applies retroactively to all wages paid during the year. This means that, even if you’ve been paying payroll taxes correctly throughout the year, you may still owe additional tax after the credit reduction is announced.
For 2024, the following states have been designated as FUTA Credit Reduction States:
If you employ a household worker in one of these locations, your FUTA tax rate will be higher.
Here’s how it works:
These changes can increase your overall tax burden, but with the right support, paying the increased liability is easy.
If you live in a credit reduction state, you will owe more in FUTA taxes.
For example, if you employ a household worker in California or New York, the credit reduction for 2024 is 0.9%, meaning you’ll pay a total FUTA rate of 1.5% instead of 0.6%. This change increases your total FUTA tax liability by up to $63 per employee.
Managing household payroll taxes is complicated enough without surprise tax increases. Fortunately, HomeWork Solutions takes the stress out of this process. Here’s how we support our clients when FUTA credit reductions are announced:
Our goal is to make sure you don’t have to worry about unexpected payroll tax adjustments. Our proactive approach means you’ll be prepared, and we’ll handle the details on your behalf.
If you have questions about FUTA credit reductions, your household employer obligations, or the labor laws in your state HomeWork Solutions is here to help. We simplify payroll for household employers, providing peace of mind that your taxes are handled accurately and on time.
With over 30 years of experience in household payroll compliance, we know how to navigate changes like FUTA credit reductions. Our dedicated team ensures you’re always in compliance with federal and state tax requirements.
Want to learn more about our payroll services? Contact HomeWork Solutions today to see how we can make managing household payroll simple and stress-free.
No surprises. No stress. Just expert support.