Why You Should Plan for Much Higher Minimum Wage Rates in 2023

Oct 14, 2022 | GTM Blog, Newsworthy, Tax & Wage Laws

Minimum wage rates for 2023 – in many states and cities – are already seeing significant increases especially if they are tied to the Consumer Price Index or inflation. Here’s where it’s happening and what household employers need to know.

Back in July, the California Department of Finance told Governor Newsom that the state’s minimum wage will be raised to $15.50/hour on January 1, 2023, for all employers – regardless of their size. For small employers – like families with household help – this represents a 10.7 percent jump in the minimum wage.

Rising minimum wage rates – especially in California – come as no surprise to most household employers. While the federal minimum wage rate has remained stagnant at $7.25/hour for more than a decade, many states, cities, and counties have been boosting their rates on a set schedule usually on January 1 or July 1.

But this wage hike in California was a surprise since it exceeded the state’s scheduled increase for 2023. That’s because the department of finance can adjust the minimum wage due to inflation considering the latest Consumer Price Index (CPI), which is set by the federal Bureau of Labor. In California, when inflation exceeds seven percent, the state’s minimum wage rate becomes the same for all employers effective the following January 1.

The CPI for Urban Wage Earners and Clerical Workers (CPI-W) for the 12-month period from July 1, 2021, to June 30, 2022, increased by 7.9 percent triggering the minimum wage rate increase.

Dozens of cities in California already have higher rates than the state minimum wage – meaning that’s the rate household employers should follow – but even some of these localities tie their rates to inflation.

Minimum wage rates tied to the CPI, inflation

These automatic CPI-based increases in minimum wage laws were included to help fight the rising cost of living for workers. However, state and local lawmakers likely didn’t anticipate unusually high inflation combined with a tight job market when these laws were passed.

According to the Fair Labor Standards Act, nannies and other household workers must be paid at the least the highest applicable minimum wage of the federal, state, or local rates.

California is not alone. Fourteen states – including Illinois, New Jersey, New York, and Virginia – are raising their minimum wage rates next year. These rate increases – along with those of other states – are often automatically tied to the CPI, inflation, or some other index like the cost of living.

Cities see significant minimum wage rate hikes

Big cities – which often have higher rates than their state rates – are also giving the minimum wage a big boost.

With this year’s high inflation increasing the CPI, hourly wages may grow by $1 or more in certain locales.

For example, Denver is raising its rate from $15.87 to $17.29 on January 1, 2023 – a nearly nine percent increase. A bill signed in 2019 mandates that, after 2022, the city’s minimum wage rate is tied to the regional CPI.

About two dozen other cities and counties can expect to see similar growth in hourly wages.

Some cities have already put rate hikes in place due to rising regional CPIs. On July 1, Washington, D.C. raised its minimum wage 90 cents to $16.10/hour; Los Angeles went from $15/hour to $16.04/hour and San Fransisco saw a relatively modest 67-cent increase to $16.99/hour.

CPI indexing will trigger significant automatic minimum wage increases in cities like Seattle, which will see an 8.2 percent boost in hourly wages to $18.69/hour.

What’s next for minimum wage rates

Several states that are still on fixed-rate schedules for minimum wage increases expiring in the coming years could turn to inflation-based rate hikes, which will likely exceed past growth in hourly wages.

While not common, some states do have limits on their minimum wage rates. California, for example, will cap its annual statewide minimum wage increases at 3.5 percent. Minnesota will do the same at 2.5 percent. However, seeing these large, automatic increases may force more cities and states to provide a cap on annual minimum wage growth.

How household employers can prepare

Visit Minimum Wage Rates for Household Employees to get the current minimum wage rate for your state or city and what you can expect for next year and beyond.

While nannies and other household workers must be paid at least minimum wage, many families go well above this rate to attract top-quality candidates to their jobs. Still, as hourly wages creep higher, household employers should evaluate their workers’ pay rates to ensure it’s still competitive in the marketplace.

GTM can help

Paying your employee the right way and taking care of taxes is a big hassle for busy families. Let GTM Payroll handle payday and remit your household employment taxes on time, every time. It can be that easy. To learn more, call (800) 929-9213 and a get complimentary, no-obligation consultation with a household employment expert. Or schedule time with us at your convenience. We can review your employer obligations and answer questions about having someone working in your home.