“What are the tax benefits of paying my household employee legally?” We’re glad you asked! There are two tax breaks available for household employers that can help offset the expenses of paying an employee “on the books.”
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 their FSA. Household employers should check with their company’s HR department or benefits administrator for FSA enrollment information.
The second option is the Child and Dependent Care Tax Credit. Families who do not have access to an FSA (or who missed the enrollment period for that year) can utilize the Child and Dependent Care Tax Credit (IRS Form 2441) on their individual tax return (Form 1040). Many families with one child will receive a 20% tax credit on up to $3000 of child/dependent care related expenses while families with two or more children will receive a 20% credit on up to $6000 of child/dependent care related expenses. This translates to a tax credit of as much as $600 for families with one child/dependent and $1200 for families with two or more children/dependents.
Generally, household employers are only able to claim one of the above tax breaks. In some circumstances, families with two or more children/dependents are able to utilize both tax credits.
In most circumstances, household employers are only able to claim the above tax breaks if they are paying their employee legally. When you sign-up for NannyChex, we ensure that you are set-up with the proper tax accounts to utilize these tax breaks, and we provide the necessary documentation for getting reimbursed for an FSA and completing Form 2441 for the Child and Dependent Care Tax Credit on your tax return.
Please call our office at 877-626-6924 and one of our knowledgeable tax experts are available to discuss these tax breaks in greater detail and apply them to your own individual circumstances.