Sole proprietorships and unemployment insurance.
A sole proprietorship is you, doing business. You don't pay unemployment insurance on your own earnings, but the day you hire someone, you become an employer, and that changes.
What it is
A sole proprietorship is a business owned by one person, with no separate company behind it. For taxes, the business and the owner are the same. Many businesses start this way.
Are you an employee of your own business?
No. The IRS treats a sole proprietor as self-employed, not as an employee, so what you earn from the business is not wages for federal unemployment tax (FUTA).
States decide this for state unemployment insurance. New York, for example, does not cover a sole proprietor's own earnings, and does not let the owner opt in.
When you become an employer
- Federal unemployment tax applies once you pay $1,500 or more in wages in a calendar quarter, or have an employee on at least part of a day in 20 or more different weeks of the year.
- You need an Employer Identification Number (EIN) from the IRS once you have employees.
- Each state sets its own test for when you must register for state unemployment insurance (SUI). In New York, it is the first quarter you pay $300 or more in wages.
- Paying your state unemployment tax in full and on time earns a credit of up to 5.4% against the 6.0% federal rate, which can bring the federal rate down to 0.6%.
Family on your payroll
Federal law exempts some family members from FUTA when they work for a sole proprietor: your spouse, your child under 21, and your parent.
Social Security and Medicare follow a different rule: a child is exempt from those only under 18. So the same paycheck can be exempt from one tax and not from another.
States set their own family rules. New York excludes a sole proprietor's spouse and children under 21, including stepchildren.
What changes from state to state
- How much you have to pay in wages before you must register.
- Which owners, officers, members and family members count as employees.
- The tax rate for a new employer, and how much of each employee's pay it applies to.
- The registration form, and what it asks about the owners.
The rules that decide your registration are your state's.
No. Your own earnings are not wages, so they are not subject to federal unemployment tax. In New York, they are not subject to state unemployment contributions either, and you cannot choose to cover yourself.
Very likely. Once you pay wages, the federal and state tests start counting. In New York, you become liable on the first day of the quarter in which you pay $300 or more. You need an EIN from the IRS first.
For federal unemployment tax, pay to your spouse, your child under 21 and your parent is exempt when you are a sole proprietor. States set their own rules; New York excludes your spouse and your children under 21.
Sources
- IRS Publication 15 (2026), Employer's Tax Guide
- IRS: Self-Employed Individuals Tax Center
- IRS: Sole Proprietorships
- IRS: Employer Identification Number
- NY DOL: Covered or Excluded Employment
- NY DOL: Register for Unemployment Insurance
Plain-language guidance, checked against the sources above. It is not legal or tax advice; for your own situation, ask a qualified tax professional or the agency.