Recently enacted at the end of December 2022, SECURE 2.0 incorporated numerous changes for employer and employee retirement options. As part of these changes and effective for the 2023 tax year, domestic employers are now allowed to set up and fund a SEP-IRA for their nannies, housekeepers and other domestic employees that they employ, pay wages to and report on a Form W-2. The maximum allowed SEP-IRA funding is 25% of the employee’s reported W-2 wages annually. Establishing and funding a SEP-IRA for a nanny or other household employee is a great option for paying a year-end bonus to show appreciation for the employee’s commitment throughout the year. Funding the SEP-IRA is tax deferred compensation to the employee without creating a tax current liability for the employee and provides them with a long-term retirement planning opportunity.
Prior to 2023, a SEP-IRA retirement option was only allowed for employers and employees in an active trade or business, and not permitted for household employers.