The tax benefits for household employers who pay their employees “on the books” were given a boost with the recent passage of the American Rescue Plan. Household employers were always able to claim tax credits through contributing to their Dependent Care Flex Spending Account (FSA) and/or through the Child and Dependent Care Tax Credit, but the recently passed legislation increases the tax savings for household employers.
Dependent Care Flex Spending Account (FSA)
Many businesses offer their employees an FSA account as part of their company benefits plan. This program allows employees to contribute pre-tax money to a dependent care FSA and then get reimbursed for qualified expenses like wages paid to a nanny up to the amount contributed. In recent years, the contribution limit was $5000. For 2021, the contribution limit has been increased to $10,500. For those who able to utilize this program, the tax benefit will vary based on each individual’s income, location, and amount contributed to the FSA account, but individuals can calculate their tax rate and know that they will lower their taxable income by that amount for all dollars contributed.
For information on enrolling in an FSA plan, please consult your HR department or company’s benefits administrator. They will assist in getting you started and will provide you with everything they require for reimbursement.
Many NannyChex clients utilize FSA plans, and we are able to provide customized documentation to each client to ensure you get reimbursed for all FSA dollars contributed.
Child and Dependent Care Tax Credit
Household employers were always able to use IRS Form 2441 to itemize child and dependent care expenses on their federal tax return. In previous years, families received a 20 percent credit on child and dependent care expenses of $3000 for families with 1 child/dependent and $6000 for families with 2 or more children/dependents. For 2021, these limits have increased to $8000 for families with 1 child/dependent and $16,000 for families with 2 or more children/dependents. With the increased limits under the American Rescue Plan, many families who previously received a tax credit of $600 with 1 child/dependent or $1200 with 2 or more children/dependents will now receive a tax credit of $1600 with 1 child/dependent and $3200 for two or more children/dependents. The amount of credit will vary based on each individual’s income, and there is a gradual decrease of credit as income increases.
Many NannyChex clients utilize the Child and Dependent Care Tax Credit, and all of the information that is needed to claim this credit on IRS Form 2441 is included in the year-end tax packet that we prepare for each of our clients.
Qualifying for the Tax Credit
In order to qualify for a tax credit by utilizing a dependent care FSA and/or the Child and Dependent Care Tax Credit, an employer must pay their employee legally.
Exisitng NannyChex clients will be able to continue to utilize the documentation we prepare to maximize their tax savings.
If you are not a NannyChex client or are not currently paying your employee "on the books" there is no better time to formalize your employment arrangement and start paying your employee legally. If you'd like to speak with one of our tax pros, please call us at 877-626-6924, or you can start the process online.