You had to let your nanny go and they filed for unemployment. Now you have received an unemployment notice from your state labor agency. You have not been through this before and are unsure what to do. The notice says something about “notice of potential charges” or “notice of unemployment insurance claim filed.”
What should you do if you get an unemployment notice?
First, relax. If you have paid your nanny legally and they were let go through no fault of their own, you have nothing to worry about. Just follow the instructions for employers on the notification and pay attention to any response deadline you may need to meet.
If you have been paying your nanny “under the table,” then you have some work to do and could be facing fines, penalties, and payment of back taxes. You may have also opened yourself up to an audit of your other household employment tax obligations.
But we will get to all of that in a moment. Let’s go through some frequently asked questions you may have about unemployment.
Do household employers pay unemployment taxes?
If you pay a nanny or other household employee (like a senior caregiver, housekeeper, or private teacher) more than $1,000 in a calendar quarter, then you will owe federal unemployment taxes (FUTA). You will also owe state unemployment taxes (SUI) if you meet the threshold for your state.
This an employer-only tax. For FUTA, it is six percent on the first $7,000 in wages. SUI rates vary and typically fall between two and five percent. You may be able to take a credit against your FUTA tax for payments made into your state unemployment funds. This could reduce your federal rate to as low as 0.6 percent.
In a handful of states (Alaska, New Jersey, and Pennsylvania), employees contribute to unemployment.
Federal and state unemployment taxes can be remitted on a quarterly basis.
Are nannies and other household employees eligible for unemployment?
Yes, nannies and other household workers are considered employees (not independent contractors) and are eligible for unemployment benefits just like those in the traditional workforce.
This is one reason why it’s important to view your nanny as an employee and not an independent contractor.
Independent contractors, on the other hand, are usually ineligible for unemployment. However, federal legislation to help out-of-work individuals during the pandemic includes independent contractors and “gig economy” workers.
To receive unemployment, a nanny’s employer needs to have paid their federal and state unemployment taxes and they must have lost their job through no fault of their own or had their hours reduced. You may let go of an employee because of compatibility issues, change in family needs, the term of the job has ended, or more recently, employees have lost their jobs due to the COVID-19 pandemic. They can’t receive unemployment if they left their job voluntarily.
If they were fired for cause, you could deny their claim, and they may not be able to receive benefits.
Who pays for unemployment benefits?
Your state will pay unemployment benefits to eligible individuals. The money you contributed to unemployment taxes goes into a fund that is available to those who are out of work to temporarily replace a part of their income as they look for a new job.
As an employer, you do not directly pay your employee’s unemployment benefits. Your responsibility is to pay unemployment taxes.
What happens when my household employee files for unemployment?
Your nanny will file a claim through your state labor agency. On their claim, they will list their past employers, which will include your family. You will receive a notice in the mail. It may say “Unemployment Insurance Notice of Potential Charges.” But do not worry. If you are up to date on your taxes, you do not need to pay anything extra because your nanny is claiming unemployment benefits.
You may not need to do anything when you receive this notice. It is notifying you that a claim has been made.
You should still review the information presented in the notice. Make any necessary corrections to gross wages if needed. Perhaps you provided a severance, paid out unused PTO, or their final paycheck is being delivered a week after their termination date – anything that may not be included in the gross wage amount on the unemployment notice. These types of one-time payouts may impact the amount your nanny will receive in unemployment benefits.
You will also be able to protest your employee’s claim to unemployment using this notice. Again, if they were fired for cause such as dishonesty, theft, or insubordination or left their job voluntarily, they may not be eligible for benefits. You will likely need to show any documentation that justified this type of termination. For example, you could provide the written warnings you gave your nanny that are signed by both parties.
Ultimately, the state will decide whether to grant or deny unemployment benefits to your employee.
In some states, like California, employers are required to provide their workers with a written termination notice. Keep a copy of that notice in case you need it to document your claim dispute.
It is best to respond as soon as possible – there may be an online submission option – especially if you are asked about the reason for employment separation or reduction of hours. This will help remove any delays to your nanny receiving their benefits. If you do not reply by the response deadline, you could face a fine.
My notice reads “Employer’s Potential Charges.” What does that mean?
This can be a little confusing. Under “employer’s potential charges,” it is showing you how much your employee will receive in unemployment benefits. This is being “charged” to your UI account (more on that below).
You are not paying this amount out of pocket. However, based on these charges, your UI tax rate may go up slightly next year.
What if I have not been paying household employment taxes?
One of the easiest ways to get caught paying your nanny illegally is when they file for unemployment. During the pandemic, many household employees are filing claims – especially when the federal government was adding $600 to their weekly benefits.
By paying “off the books,” you are avoiding federal and state unemployment taxes. When your nanny files and lists you as a recent employer, your state labor agency will quickly realize you have not made your required contributions. This could mean thousands of dollars in failure-to-file penalties from the state and paying back the unemployment taxes you owe.
In addition, the IRS will be notified. You could also face additional fines and penalties and pay back (with interest) other federal taxes you have skipped like Social Security and Medicare.
To avoid this financial nightmare, you could try to catch up on unemployment taxes before your nanny files. Ideally, you should pay back taxes from the start of your nanny’s employment with you. At the very least, for the past five quarters. If you have taxes that were due in 2019, you may face penalties for late payment (unless you received an extension and filing by October 15). Still, that may be a better scenario than not catching up at all.
Will my unemployment tax rate go up if my nanny files a claim?
The amount you owe in unemployment taxes is based on your experience rating. If there is a claim, your rate may increase slightly when you hire another employee. It is like car insurance. If you have an accident, your rates may go up. With the CARES Act, pandemic-related claims will not influence your experience rating.
If you are a first-time employer, you may receive a new employer rate. Then your state will provide an updated rate every year. Your rate is based on several factors including longevity as an employer and the number of unemployment claims made by former employees.
What if I have more questions?
For any state-specific questions, here is a list of contacts for unemployment information and assistance. Clients of GTM Payroll Services can call our client support team at (800) 929-9213 and we will be happy to help with any household employment questions.
GTM can help
If you would rather not deal with the hassles of figuring out and remitting unemployment taxes, give GTM Payroll Services a call at (800) 929-9213. We will handle all your tax obligations including unemployment, Social Security, and Medicare in addition to paying your employee and calculating their withholdings. We offer a complimentary, no-obligation consultation with a household employment expert who can answer all your questions about hiring and employing someone for your home.
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