FUTA Tax Exemption: Family, Household, and Farm Rules

A FUTA tax exemption applies in two ways. Some employers are outside the Federal Unemployment Tax Act entirely: 501(c)(3) nonprofits, state and local governments, and federally recognized tribal governments owe nothing regardless of size or payroll.¹ Beyond those blanket exemptions, specific categories of work are carved out even when the employer is otherwise covered — wages paid to your spouse, your child under 21, or your parent in a sole proprietorship, most household and small-farm labor below dollar and headcount thresholds, work done by students for the school they attend, H-2A agricultural workers, and anything paid to a genuine independent contractor.

Employers That Owe No FUTA at All

Three categories of employers sit entirely outside FUTA’s definition of “employer”:

501(c)(3) nonprofits. Religious, charitable, educational, and other organizations holding tax-exempt status under Section 501(c)(3) are not subject to FUTA. They still participate in state unemployment insurance, and many have the option to reimburse the state for actual benefits paid to former employees rather than paying quarterly premiums.¹
State and local governments. State agencies, cities, counties, school districts, public universities, and instrumentalities wholly owned by one or more state or local governments are exempt.¹
Federally recognized Indian tribal governments. Tribes, their subdivisions, and wholly owned tribal business enterprises get the same treatment as state governments.¹

If you’re a private business and don’t fit one of these categories, you’re almost certainly a covered employer. The rest of this article is about the exemptions that can still take specific workers off your FUTA bill.

Are You Even a Covered Employer?

Before worrying about worker-level exemptions, check whether you cross the coverage threshold at all. A general (non-agricultural, non-household) employer owes FUTA only if one of the following is true: you paid $1,500 or more in wages during any calendar quarter of the current or prior year, or you had at least one employee for any part of a day in 20 different calendar weeks of the current or prior year.¹ Miss both, and you owe nothing. Agricultural and household employers get separate tests, described below.

Family Members You Can Employ Without Owing FUTA

Family employment is one of the most useful and most overlooked FUTA carve-outs. The rules turn on the relationship and how your business is organized.

Your Child Under 21

Wages you pay to your child under 21 are exempt from FUTA if your business is a sole proprietorship or a partnership in which every partner is the child’s parent.² The exemption ends the day the child turns 21. It does not apply if you’ve organized the business as a corporation, or if the partnership includes anyone who isn’t the child’s parent.

Your Spouse

Wages paid to your spouse are not subject to FUTA.³ Income tax withholding and Social Security and Medicare still apply; FUTA does not.

Your Parent

If you employ a parent in your sole proprietorship, those wages are exempt from FUTA regardless of the work performed.² The same treatment can apply when a parent provides domestic services in a son’s or daughter’s home under certain conditions. If your business is a corporation, partnership, or estate, though, a parent on the payroll is treated like any other employee and FUTA applies.

Household Workers Below $1,000 a Quarter

If you hire someone to work in your private home — a nanny, housekeeper, or home health aide — you owe FUTA only when you pay $1,000 or more in cash wages during any calendar quarter of the current or preceding year.⁴ Stay under that quarterly threshold and the employment is exempt. Wages you pay to your spouse, your child under 21, or your parent don’t count toward the $1,000 test.

Agricultural Labor Below the Farm Thresholds

Farm employers owe FUTA only if they cross one of two lines: paying $20,000 or more in cash wages during any calendar quarter, or having 10 or more workers for at least part of a day in 20 different calendar weeks during the current or preceding year.⁵ Noncash compensation such as meals or housing doesn’t count toward either test. Most small farms with seasonal crews of fewer than 10 people stay below both and owe nothing.

Wages paid to H-2A visa holders performing agricultural labor are specifically exempt from FUTA even when the employer otherwise exceeds the agricultural thresholds.⁶

Students Working for Their School

Work performed by a student who is enrolled and regularly attending classes at the school, college, or university that employs them is exempt from FUTA.¹ Work-study positions typically fall under this exemption. It also extends to the spouse of an enrolled student when the school hires the spouse through a financial assistance program and tells the spouse upfront that the job won’t be covered by unemployment insurance.

Independent Contractors

FUTA reaches only employee wages. Payments to genuine independent contractors don’t trigger FUTA, Social Security, Medicare, or unemployment taxes.⁷

Treat this as a legal category, not a label of convenience. The IRS looks at whether you control what work is done and how it’s done. If the agency later reclassifies a contractor as an employee, you can be held liable for all unpaid employment taxes on those wages, including FUTA, plus penalties and interest.⁷ A written agreement calling someone a contractor doesn’t override a working relationship that looks like employment.

If No Exemption Applies

Private employers who don’t qualify for any exemption still rarely pay the headline 6.0% rate. The statute grants a credit of up to 5.4% for paying state unemployment taxes on time and in full, which drops the effective FUTA rate to 0.6% on the first $7,000 of each employee’s annual wages.⁸ That works out to a maximum of $42 per employee per year, and it’s what most U.S. employers actually pay.⁹

The credit depends on staying current with your state unemployment contributions. Late state payments are the most common way employers accidentally lose part of the credit and end up paying more FUTA than they had to. Employers in a designated credit reduction state lose part of the 5.4% credit as well, which can push the effective rate higher even when the state payments themselves are on time.¹⁰

If you’re claiming any of the exemptions above, keep the paperwork that supports them. The IRS requires employers to hold employment tax records for at least four years after filing, and that includes documentation of family relationships, business structure, student enrollment, contractor status, or anything else you relied on to leave wages off Form 940.¹¹

1
Office of the Law Revision Counsel. 26 USC 3306 Definitions
2
Internal Revenue Service. Family Employees
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Internal Revenue Service. Understanding Taxes When a Family Member Signs the Paycheck
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Internal Revenue Service. Topic No. 756, Employment Taxes for Household Employees
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U.S. Department of Labor. Unemployment Insurance Tax Topic
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Internal Revenue Service. Aliens Employed in the U.S. – FUTA
7
Internal Revenue Service. Independent Contractor (Self-Employed) or Employee?
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Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements
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Internal Revenue Service. Federal Unemployment Tax
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Internal Revenue Service. FUTA Credit Reduction
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Internal Revenue Service. Employment Tax Recordkeeping