Unemployment Benefits

Employer Unemployment Tax Exclusions

Employers are legally required to pay unemployment taxes for their employees. But did you know that there are some exceptions to that rule? Rather than overpay your payroll taxes, you might check with your state employment agency to see if any of these employment tax exclusions apply.

As a business employer, you're required to pay unemployment taxes for your employees.

Depending on your experience rating and other factors, unemployment taxes can represent a significant financial burden–especially if your company is located in an industry that regularly experiences layoffs.

Yet many business owners are unaware of the existence of certain employer unemployment tax exclusions. In some situations, you may not be required to pay unemployment taxes for your employees, or at least not until the employee crosses a specified income threshold.

The big variable in all of this is the fact that the unemployment benefit system is administered by individual states. This means that each state is free to create their own definitions regarding the kinds of workers that trigger the payment of unemployment taxes. You'll need to do your own research to verify the exclusions in your state. But many states offer some kind of unemployment tax exclusion for the following workers:

  • Agricultural labor. Agricultural workers are often exempted from unemployment tax if the nature of their job is transitory or if the employer's salary expenses are not significant.
  • Domestic help. If the income for a part-time domestic helper is negligible (e.g. less than $1000 per quarter) then the unemployment tax requirement is frequently waived.
  • Casual labor. Other forms of non-regular, casual labor are also commonly exempted from unemployment tax. Coverage varies widely by state, but people who are employed for a short period of time may be treated as exceptions.
  • Commission-based employees. In many states, commission-based employees in certain industries are exempt if their salaries consist of 100% commissions.
  • Family workers. Family members are almost universally exempt from unemployment tax requirements. For tax purposes family members are usually defined as parents, spouses, and children under the age of 21 years old.
  • Government employees. This one's a real shocker–the government exempts itself from the requirement to pay unemployment tax for its workers.
  • Nonprofit employees & ordained clergy. Nonprofit organizations are commonly exempt at some level, e.g. they may be required to pay only the amount of benefits that have actually been distributed to their laid off employees. As with other areas of tax law, ordained clergy are exempt from unemployment taxation.

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