Smart Savings: How Dependent Care FSAs Cut Costs for Nanny and Caregiver Expenses
Many people who hire household employees have access through their company to a Dependent Care Flexible Spending Account (FSA). If you like saving money, count yourself as lucky if you have this! Please take advantage of this opportunity if you have hired (or plan to hire) a nanny or caregiver for a dependent, whether that is for a child or an adult who is incapable of self-care. If you’re going to have a baby, adopt, or are switching from part-time to full-time, you’ll have a perfect reason to trigger open enrollment for yourself and get an FSA set up.
A Dependent Care FSA is a pre-tax benefit account used to pay for dependent care services (daycare and summer camp also counts!). The money you contribute to a Dependent Care FSA is not subject to income taxes, so you end up paying less in taxes and taking home more of your paycheck.
The higher your income and tax bracket, the more you save. For example, if you are in the 35% tax bracket and you put aside the max $5,000, you save $1,750. You can try this handy calculator at WageWorks to see how it could work for you. And here’s an example of how a Dependent Care FSA offset all the taxes for a part-time nanny.
General Rules:
1-The caregiver or nanny must have been hired so you, or you and your spouse, can work, look for work or go to school.
2-Under this type of account, a “dependent “ is a child under 13 years of age (until the day of their 13th birthday) and adult dependents who can't take care of themselves. Please keep in mind that they must live with you and be claimed as dependents on your tax return.
3-Any money left in your Dependent Care FSA at the end of the plan year is forfeited to your employer per IRS regulations, so please plan your contributions and expenditures carefully.
How do I do this?
You fund your Dependent Care FSA through your employer. During your company's Open Enrollment period, you tell your employer how much you would like to contribute to your account for the coming year. The maximum amount you can contribute is determined by the IRS. Your employer then deducts your contribution amount (in equal portions) from your paycheck in pre-tax dollars throughout the plan year. As soon as your account is funded, you can use your balance to pay for many eligible dependent care expenses.
Once an election for the FSA has been made, you cannot change the amount unless you terminate employment with your company or there is a change in status. Valid changes in status include:
Legal marital status change – marriage, divorce, death of spouse, legal separation or annulment
Change in number of dependents – birth, adoption, death of a dependent
Employment – change in employment status of employee, spouse or dependent to include termination, switching from part-time to full time or vice versa, return from an unpaid leave of absence
Residence – change in the residence of employee, spouse or dependent that changes the service area in which you are located
Dependent eligibility – situations where a dependent satisfies or ceases to satisfy the rules for eligible dependents due to the attainment of age, student status, or similar circumstances as provided in the plan
Contact your employer to get more details on how it can work for you, and how to sign up.
Additional Tax Savings
Child and Dependent Care Tax Credit – If you don’t have access to a Dependent Care Account, you can claim the Child and Dependent Care Tax Credit (Form 2441) on your personal income tax return at year-end. You can claim up to $3,000 of the un-reimbursed qualifying child care expenses paid in a year for one qualifying individual, or $6,000 for two or more qualifying individuals. The credit can be anywhere from 20% to 35% of your qualifying expenses. You can also add this onto the FSA, to top off the credit. If you have more than one dependent and you maxed out the FSA at $5,000, you can claim an additional $1,000 from this tax credit to get to $6,000.
The information provided on this page is general in nature. This is not to be taken as tax, legal, benefits, financial, or HR advice. Since rules and regulations change over time and can vary by location, consult an attorney or financial advisor for your specific situation.