Household employers have two tax breaks available to them to help offset the costs of child/dependent care:
The first (and usually best) option is utilizing a Dependent Care Flexible Spending Account (FSA). Many companies offer FSAs which allow a household employer to contribute up to $5000 of pre-tax income to be used for child/dependent care expenses. The tax benefit to each employer will depend on their marginal tax rate, but many families find that they save $2000 or more by utilizing an FSA. Household employers should check with their company’s benefits administrator for enrollment information.
The second option is the Child and Dependent Care Tax Credit. Families who do not have access to a FSA (or who missed the enrollment period for that year) can utilize the Child and Dependent Care Tax Credit (Form 2441) on their individual tax return (Form 1040). A tax credit of 20 to 35% is available on qualifying child and dependent care expenses which are limited to $3000 for one qualifying dependent or $6000 for two or more qualifying dependents. This translates to a savings of as much as $600 for one dependent and $1200 for two or more dependents.
Generally, household employers are only able to claim one of the tax breaks above. In some circumstances, families with 2 or more dependents will be able to combine the two credits to increase their savings.
In most circumstances, household employers are only able to claim the above tax breaks if they are paying their employee legally. For additional information on paying your nanny or other household employee and withholding the taxes, along with claiming the tax breaks that are available to domestic employers, please contact NannyChex today for a free consultation!