As we look ahead to a new year, what household employers can expect in 2023?
Here are 8 things to pay attention to if you employ someone to work in your home like a nanny, housekeeper, or in-home senior caregiver.
1. Competitive nanny pay rates
Last year was one of the tightest nanny job markets in recent memory, or, maybe ever. With daycare centers closed or offering limited availability, the demand for in-home childcare skyrocketed. While that demand may have slowed a little bit, hourly rates for nannies increased by up to $4/hour.
In our recent survey of household employers, 30 percent of families said their nannies’ pay rates increased by at least $4/hour in the past three years. Another 27 percent said their rates increased by $2-3/hour.
Families who haven’t given their caregivers a raise recently, or who are looking to hire a nanny, may want to check the market rates for their area to make sure they’re offering competitive wages.
Families in the market for a nanny should also present themselves as desirable employers. In our recent survey of nannies, guaranteed hours, working for a trustworthy/ethical family, and the personality of the family were more important to them than the rate of pay.
As demand for their work remains high, the survey also showed that nannies are turning down jobs that do not pay “on the books” with only six percent of in-home caregivers saying they were “very likely” to take a position without legal pay. The pandemic has brought into sharp focus how household employees benefit from legal pay from qualifying for unemployment to coverage under paid leave laws.
While most nannies receive paid time off, paid holidays, and vacation time, health benefits remain somewhat elusive for in-home caregivers. Consider offering a health reimbursement account as part of your compensation package to stand out among potential employers, or retain your best workers, and help your nanny offset the costs of health care. Both you and your employee will save on taxes as contributions are made pre-tax and reimbursements are untaxed.
2. Rising minimum wage rates
Many states and cities have announced significant increases to their minimum wage rates for 2023 especially if they are tied to the Consumer Price Index (CPI), inflation, or the cost of living. 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.
Fourteen states – including Illinois, New Jersey, New York, and Virginia – are raising their minimum wage rates next year.
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. About two dozen cities and counties will increase their minimum wage rates by up to eight percent.
It’s important for household employers to check the rate that applies to them as their nanny’s hourly pay could quickly become a wage violation. The highest wage of the federal, state, and local rates applies to household employment. Paying below minimum wage and not accounting for overtime hours are two of the easiest ways families fall out of compliance with nanny tax laws and could face fines and penalties as well as a lawsuit from a disgruntled employee.
3. New tax reporting rule
UPDATE: The IRS has delayed the implementation of this new tax reporting rule. Receiving payment for services via a mobile app won’t generate a Form 1099-K if these payments totaled more than $600 in 2022. The rule will now apply to 2023 payments. Read more.
In 2022, paying for goods and services – like babysitting or childcare – through third-party settlement organizations (like Venmo, PayPal, and CashApp) will be reported to the IRS if those transactions total $600 or more in a year. That means babysitters and other caregivers will get a Form 1099-K in January if they exceeded that threshold for payments made by mobile apps. Previously, a 1099-K would only be issued if a caregiver had at least 200 transactions worth a combined $20,000 or more.
For the 2022 tax year (returns due by April 15, 2023), babysitters will need to consider the amounts shown on their Form 1099-K when preparing their income tax returns. The IRS will be able to cross-reference both the third-party network report and the one issued to your babysitter.
4. Expanding paid family and medical leave laws
UPDATE: The new effective date for employer and employee contributions to Maryland’s Family and Medical Leave Insurance program will be October 1, 2024. The start date for benefits payments to covered employees has been pushed back to January 1, 2026.
Three more states are requiring contributions to paid family and medical leave programs. There are now 11 states with paid leave requirements including Connecticut, Massachusetts, New Jersey, New York, and Washington.
Passed into law in 2020, Colorado’s paid family and medical leave insurance program (FAMLI) program covers virtually all employers. Employer and employee contributions begin on January 1, 2023, with benefits becoming available on January 1, 2024.
While families likely won’t need to contribute (unless you have 10 or more workers), there is a payroll deduction for employees, which will be 0.45 percent of their pay.
Employee contributions to Oregon’s Paid Family and Medical Leave (PFML) program also start on January 1, 2023. Again, families are likely exempt from paying into the program (unless you have 25 or more workers) but employees are required to contribute 0.6 percent of their wages.
Maryland established a Family and Medical Leave Insurance Program (FAMLI) that covers just about all full- and part-time workers in the state. The program will be funded through a payroll tax that is scheduled to begin on October 1, 2023. Since only employers with 15 or more workers will need to contribute to paid leave, household employers likely will not need to pay this tax. However, all workers – no matter the size of the employer – will need to contribute through a payroll deduction.
The state’s Department of Labor will determine the tax rate no later than June 1, 2023.
Check with your state’s labor agency to see what paid leave requirements you may have as a household employer. For GTM Payroll clients, we will handle these employee pay deductions for you.
5. Increasing domestic worker protections
In 2022, we saw a number of domestic worker protections put in place across the country – some specific to the household employment industry and others geared to all employees including domestic workers.
That trend will seem to continue in 2023.
A Domestic Workers’ Bill of Rights has been introduced in the New Jersey state legislature. There’s been some recent movement on this (the New Jersey Senate Labor Committee just advanced the legislation) and it could become law next year. The bill, in its current state, would establish work agreements between employees and families, require a two-week termination notice, and provide paid rest and meal breaks.
In Washington, D.C., a Domestic Workers’ Bill of Rights was passed unanimously by the D.C. Council during its final legislative session of the year. The bill now goes to Mayor Muriel Bowser to sign into law or veto. The Domestic Worker Employment Rights Act would protect household employees from sexual harassment and discrimination based on race, national origin, and other factors. It would also require written work agreements that outline rights and responsibilities.
6. Filing your 2022 taxes
When filing your 2022 tax return, the Child and Dependent Care Tax Credit reverts to its previous amounts for expenses of $3,000 for one child and $6,000 for two or more children and the typical 20 percent credit returns as well. For 2021 taxes, the American Rescue Plan had significantly increased the amount of expenses a family could claim as well as the tax credit
The cap for a Dependent Care FSA has also returned to $5,000 for single taxpayers and married couples filing jointly and $2,500 each for married people filing separately. Those limits will remain in place for 2023. These accounts are funded with pre-tax dollars. A nanny’s wages are considered a qualifying expense. Depending on your marginal tax rate, you could save anywhere from $3,300 to $4,700 dollars when using a Dependent Care FSA to offset your nanny’s wages.
If you paid sick and family leave wages in 2022 for qualified pandemic-related leave taken between April 1, 2020, and September 30, 2021, dollar-for-dollar tax credits are still available and you’ll be able to reconcile that on Schedule H, which you will file with your personal tax return.
In 2020 and 2021, paid leave for pandemic-related reasons was available to household employees. While at first paid leave was mandatory, subsequent stimulus packages made it voluntary to provide.
The American Rescue Plan added waiting for COVID-19 test results, obtaining a vaccine, and recovering from the effects of vaccination as qualified reasons for paid leave.
On your employee’s W-2, you will need to indicate the amount of paid leave in box 14. Then on Schedule H, you will reconcile the paid leave provided as well as your employer tax credits.
Some of what you will need to know includes:
- qualified sick and family leave wages paid to an employee
- the employer’s share of Social Security taxes on that qualified paid leave
- the refundable and non-refundable portions of the employer tax credit for paid leave
This will all seem familiar to you if your employee took paid leave under the Families First Coronavirus Response Act in 2020.
7. Contribution limits adjusted for 2023
Several contribution limits were updated for the 2023 tax year including:
- Dependent Care FSAs: $5,000 for married filing jointly and $2,500 each for married filing separately (same as 2022)
- QSEHRA: $5,850 for individuals and $11,800 for family coverage
- Health Savings Accounts (HSAs): $3,850 for individuals and $7,750 for families
- Retirement Plan: Up to $22,500 in employee contributions to a 401(k) and $15,500 into a SIMPLE 401(k)
- Qualified Transportation Benefits: $300 for commuting and $300 for parking
- Student Loans: Employers can provide up to $5,250 tax-free toward a worker’s student loans
8. Another boost to the nanny tax threshold
The employment coverage threshold for household employees – commonly called the nanny tax threshold – gets another boost to $2,600 in 2023. If a domestic worker meets or exceeds that threshold, Social Security and Medicare taxes must be paid by the family and the employee. That makes it easy for temporary or seasonal workers to surpass that mark and trigger nanny tax compliance. Summer and after-school nannies, as well as temporary senior caregivers, can easily reach the employment coverage threshold. When filing your 2022 taxes, use the current threshold of $2,400 to determine if you have a nanny tax obligation. The new threshold applies to wages earned in 2023.
Questions? GTM can help
For any questions about paying your nanny or another household employee in 2023, call GTM Payroll Services at (800) 929-9213 for a complimentary, no-obligation consultation with a household employment expert. Or schedule time with us at your convenience.
Download The Complete Guide to Household Payroll
Get our complimentary guide and learn everything you need to know about paying your employees legally and filing your taxes the right way.