Easiest, Most Affordable Retirement Benefit Option for your Household Employee

Retirement benefits feel so complicated.  As a household employer you are doing so much just to follow the law in paying your employee legally and following all labor laws.  Can you handle one more responsibility and cost?  Well yes, possibly.  Generally, retirement benefits are thought to be costly and difficult to administer.  That is why we aren’t writing a full blog about all your options.  We present one option, the easiest and most affordable in our opinion. Why offer retirement benefits?  Aside from the fact that you really like your nanny and want to provide all you can for them, offering a benefit like this is a good way to retain a happy employee.

After researching the options we are of the opinion that a SEP IRA is the easiest and most affordable option.  Let us explain.

SEP IRA Fun Facts

Thanks to the SECURE 2.0 Act of 2023, household employers can contribute to a SEP IRA for your household employee. This was not allowed before.

Contribution Limit: You can contribute up to 25% of your employee’s W-2 wages each year, or a maximum dollar amount (which is $70,000 for 2025, but may change annually).

The IRS has a page devoted to SEP IRA here https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep if you are looking for more detailed information.

Steps to Set Up a SEP IRA

  1. Choose a Financial Institution: You’ll need to open a SEP IRA account with a bank, brokerage firm, or other financial institution. Many offer online setup.
  2. Complete the Agreement: You’ll need to fill out paperwork with the financial institution to establish the SEP IRA plan.  This will likely involve IRS Form 5305-SEP, Simplified Employee Pension Plan.
  3. Inform Your Employee: Let your employee know about the plan and how it works.
  4. Make Contributions: You’ll make contributions directly to your employee’s SEP IRA account. You can typically do this electronically or by check.
  5. Report Contributions: You’ll need to report the contributions on your employee’s W-2 form.

A few points to keep in mind:

  • All Employees: If you have more than one household employee who meets the eligibility requirements, you must offer the SEP IRA to all of them.
  • Vesting: Contributions to a SEP IRA are 100% vested immediately, meaning your employee owns the money right away.
  • Tax Benefits: Your contributions are tax-deductible for you as the employer, and they aren’t considered taxable income for your employee until they withdraw the money in retirement.
And here is the part where this becomes your most affordable option:

The IRS has set up the Retirement plans startup costs tax credit.  (More detailed info at https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit).  These tax credits were part of 2019 and 2022 Secure Act and Secure Act 2.0 changes.  This tax credit covers all your eligible costs to set up your plan PLUS a tax credit.  Tax credits are credited as:

  • First plan year: 100% of contribution, up to $1,000
  • Second plan year: 100% of contribution, up to $1,000
  • Third plan year: 75% of contribution, up to $1,000
  • Fourth plan year: 50% of contribution, up to $1,000
  • Fifth plan year: 25% of contribution, up to $1,000

Savvy Nanny is presently seeking a partner to administer this type of Retirement Benefit specifically for our clients.  Stay tuned for that!  In the meantime, your accountant or trusted fiduciary advisor can get you started.