If you’re looking at child care and senior care solutions that involve in-home caregivers, cost is probably a big factor. It can be easy to get caught up in adding up hourly rates, overtime pay and taxes, but don’t forget to factor in ways to save money. For most families, the biggest savings you can realize is enrolling in a Dependent Care Account. We’ll break down this tax break and show you how you can save about $2,000 on your 2024 taxes.
- What a Dependent Care Account is
- How a Dependent Care Account saves you money
- What expenses can be applied to a Dependent Care Account
- How to sign up for a Dependent Care Account
- What a sample budget looks like with this tax break
What is a Dependent Care Account?
“A Dependent Care Account is a type of flexible spending account (FSA) that many employers offer to their employees. Some people refer to it as the child care FSA, but families with senior care needs can also utilize it under certain circumstances,” says Tom Breedlove, Sr. Director of Care HomePay.
Only one spouse per family can sign up for a dependent care FSA and you’re limited to putting $5,000 of your pre-tax earnings in it. Keep in mind that any money you put into your Dependent Care Account must be spent in the 2024 calendar year and cannot roll over to the following year.
How does a Dependent Care Account save money?
The money families place in their dependent care FSA are not subject to any taxes. That means up to $5,000 can be used for care-related needs without having to account for Social Security, Medicare or income taxes. The savings a family will ultimately see varies depending on what their marginal tax rate is. A good approximation is around $2,000 in tax savings, but that will vary depending on your marginal tax rate.
What expenses can be applied to a Dependent Care Account?
For in-home care, it’s most common to see the caregiver’s wages applied to the dependent care FSA. However, if a family hires a nanny or senior caregiver for a short period of time, or toward the end of the year, it’s possible that their caregiver won’t earn $5,000. In that case, the leftover funds can be put toward the family’s household employment taxes as well as the fees paid to a placement agency or care center, if the family utilized those services.
Are there qualifications for being able to sign up for a Dependent Care Account?
Yes, there are two tests that families must pass in order to have care expenses qualify for use in a dependent care flexible spending account.
Both spouses (or the parent in a single parent household) must be employed or be full-time students to demonstrate that care is needed to accommodate for those life situations. This is commonly known as the work-related expense test.
The person receiving care must pass the qualifying person test as outlined in IRS Publication 503. To summarize, a qualifying person is usually:
A child under the age of 13;
Your spouse if they are not physically or mentally able to care for themselves and still lives with you;
A person you can claim as a dependent, such as an elderly parent, that lived with you for more than half of the year because they are not able to physically or mentally take care of themselves.
How do you sign up for a Dependent Care Account?
Families can sign up for a Dependent Care Account during their company’s open enrollment period, but certain life-changing events can provide another 30-day window of opportunity. These are events like the birth of a child, a change in employment or change in child care or senior care provider.
Companies have some leeway in how they manage their FSA program, so it’s important that you check with your Human Resources contact to get all the details. At a minimum, you will usually be required to prove expenses applied to a dependent care FSA were for care-related needs. A copy of your caregiver’s paystubs generally is acceptable, but we also have a sample dependent care receipt you can use for reimbursements.
Sample budgeting scenario using a Dependent Care Account
Let’s say a family has two kids and is budgeting for about $30,000 per year for their nanny. If they are aware of the dependent care FSA, they can offer around $575 per week to their nanny so their taxes are able to be accounted for.
|
Items
|
Per Pay Period
|
Annualized
|
|---|---|---|
|
Gross pay
|
$575.00
|
$29,000.00
|
|
Social Security tax
|
$35.65
|
$1,853.79
|
|
Medicare tax
|
$8.34
|
$433.54
|
|
Unemployment insurance tax
|
+ $5.48
|
+ $285.02
|
|
Cost before tax breaks
|
$624.47
|
$32,472.35
|
|
Savings from FSA
|
| – $2,000.00 |
|
Total cost for the family
|
| $30,472.35 |
As you can see, the savings from the dependent care FSA almost completely offsets the family’s household employer taxes! This makes going through the effort of paying the nanny on the books worth the time and energy and gives the nanny several important benefits.
Through this kind of comprehensive budgeting, you can be fairly certain what your total cost of care will be and what you can afford to offer a caregiver in pay. That’s why it’s important for families to go through this exercise early in the hiring process. Use our Budgeting Calculator to run a scenario of your own and reach out to HomePay if we can be of any help. Our team of household employment experts are available to provide you with a free phone consultation to assess your specific needs.
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