By Tom Breedlove, director of HomePay Provided by Breedlove
Most people who try to hide from nanny taxes do so because they assume it will be extremely expensive. The truth is that families can offset most – sometimes all – of the employer tax costs by taking advantage of at least one of the childcare tax breaks:
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- Dependent Care Account (a.k.a. “Flexible Spending Account” or “FSA”). Most families have access to an FSA through one of their employers. FSAs allow families to contribute up to $5,000 of their pre-tax earnings to a Dependent Care Account to help pay for childcare expenses. This means that the family pays no taxes on this portion of their wages. Depending on the family’s marginal tax rate, it will save about $2,000 – $2,300 per year. Enrollment is generally limited to once a year (usually in the fall) OR within 30 days of a life-changing event (i.e. childbirth, job change, etc.). For more details about your company’s enrollment policies, you or your spouse should talk to your HR department.
- Child Care Tax Credit. For families who don’t have access to an FSA – or can’t enroll until the following tax year – the Child Care Tax Credit (IRS Form 2441) allows families to itemize up to $3,000 of childcare expenses per child (maximum of $6,000 per family per year). A tax credit percentage of 20% is applied against those expenses, saving families $600 per year if they have one child or $1,200 per year if they have two or more children.
Note: For families with access to an FSA AND 2 or more children, it’s possible to take advantage of both tax breaks simultaneously. Since families with two or more dependents are able to itemize up to $6,000 of expenses – and the FSA only utilizes $5,000 – there may be an extra $1,000 of expenses that can be claimed on Form 2441. With the 20% tax credit, it saves another $200 per year.
To calculate your tax costs and your tax breaks, visit Breedlove & Associates’ Free Nanny Tax Calculator.
Tom Breedlove is a partner at Breedlove & Associates, a full-service payroll and tax service, specializing in household employment since 1992. Breedlove & Associates is a household employment partner specializing in payroll, tax and compliance service. Call 1-888-273-3356 for a free phone consultation.