Unlocking Savings: How Legal Nanny Payments Bring Tax Breaks and Credits Your Way
Families can save money usually with at least one, if not two, tax breaks.
Tax Break One: Dependent Care FSA Account through your work
If your company offers a FSA (Flexible Spending Account) as part of your benefits package, this is the most advantageous way to save. You can use this FSA to pay for up to $5,000 of child-care related expenses using pre-tax dollars, which can save about $2,000 depending on your marginal tax rate. Check with your company’s HR or Accounting Department to find out more details and how to enroll. If you don’t have this benefit through your work, then see the second option.
Further reading: Understanding FSAs
Tax Break Two: IRS Child or Dependent Care Tax Credit
The total expenses that you may use to calculate this credit may not be more than $3,000 (for one child) or $6,000 (for two or more qualifying children). See this IRS page detailing the Child and Dependent Care Credit. Once you know how much you can claim in expenses, you then apply a percentage that depends on your adjusted gross income. Most families typically can receive a 20% credit of the $3,000 or $6,000, equaling a credit of $600 or $1,200 on your tax return.
Further Reading: Understanding the Child and Dependent Care Tax Credit
Can you combine both tax breaks?
If you have a FSA through work for dependent care, and you have two or more children, then you might be able to combine both tax breaks. The FSA is a max up to $5,000 in expenses, and two dependents with the IRS Child or Dependent Care Tax Credit allow up to $6,000. You can’t double-dip, so the difference is $1,000. You may be able to take a percentage of that additional $1,000 allowed as an additional credit, typically $200 (can vary based on your AGI). If you combine both, you can typically save $2,200.
The General Rules to qualify for the IRS Child and Dependent Care Credit:
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- Your nanny, caregiver or babysitter must have a social security or taxpayer identification number and you must pay them legally with a W-2 at the end of the year.
4- If you have an FSA (dependent care Flexible Spending Account) through work, you cannot double-dip. You’ll need to subtract the FSA from total eligible expenses.
Nest Payroll makes it easy to pay your nanny or caregiver on the books, which is a must to qualify for the tax breaks. You’ll keep a history of pay stubs made which can serve as receipts. Additionally, Nest Payroll can provide a FSA report for you at anytime during the year so you can more easily claim your reimbursement with your FSA through work.
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.