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Nanny Hiring Tip: Capitalizing on Tax Breaks

by Breedlove August 14, 2013

When families start the nanny hiring process, there are lots of questions about the cost.  Are there tax breaks available?  Which one should I use?  Are there income restrictions?  How much should I budget?

 

Here’s what you need to know. 

 

All families who pay their employee legally are entitled to at least one tax break, regardless of their income level.  The only restrictions are that the children under care must be under age 13 and both parents must pass the “work-related test,” meaning each is employed, looking for employment or a full-time student.

 

For many families, the tax savings offset most of the employer tax cost.  For some, the savings can even exceed the cost of their employer taxes (yes, it’s possible to come out ahead financially).

 

Here are the two childcare tax breaks: 

 

1) Dependent Care Flexible Spending Account (FSA). Many companies offer their employees the option to contribute up to $5,000 of their pre-tax earnings every year to an FSA. Because paying nanny taxes qualifies as a childcare expense, you can take advantage of paying these expenses tax-free. Depending on your marginal tax rate, this tax break can save as much as $2,300 per year.  If you think your company offers an FSA program, we recommend that you talk to the benefits manager about enrollment.  Open enrollment usually occurs in the fall for the subsequent tax year, but there are exceptions for life-changing events such as the birth of a child that may allow you to enroll in this tax year.

 

2) Child and Dependent Care Tax Credit. Household employers are entitled to a 20% tax credit on childcare expenses of up to $3,000 for one dependent ($600 savings) or up to $6,000 for two or more dependents ($1,200 savings). You can claim this tax credit by completing IRS Form 2441 as part of your personal income tax return at year-end.

 

Notes:

If you only have one dependent under age 13, you’ll have to choose between the two tax breaks.  For most families the FSA is the best option. 

 

If you have two or more dependents under age 13, you can take advantage of both tax breaks if your childcare expenses were greater than your FSA contribution. Excess expenses (up to the $6,000 expense limit) may be applied to the Child and Dependent Care Tax Credit on Form 2441.

 

To calculate your employer budget, visit our free Nanny Tax Calculator.  With these significant breaks, most families find that paying a nanny legally is not only the right thing to do, it’s also the wise thing to do.

Last Minute Tax Reminder: Take Advantage of the Childcare Tax Credit

by Breedlove April 10, 2013

The April 15 tax filing deadline is less than a week away and many household employers are racing to get their taxes filed on time. Along with their personal 1040 and Schedule H, household employers also need to make sure they are taking advantage of the Child and Dependent Care Expenses tax credit (IRS Form 2441) if they qualify. According to the most current IRS statistics from 2010, only 7 million people file this form nationwide.

Families qualify to file Form 2441 if they had childcare expenses for a child under 13 and both spouses work or are full-time students. Unlike other tax credits, there are no restrictions based on income level. The tax credit is 20% for up to $3,000 of childcare expenses ($600) for families with one child and 20% for up to $6,000 of childcare expenses ($1,200) for families with two or more children.

Some families may not have taken advantage of this tax credit in the past because the name sounds familiar to the Child Tax Credit. However, this is a completely different credit families with children can take to reduce their federal income tax and has no bearing on whether a family is qualified to file Form 2441.

For more information about the Child and Dependent Care Expenses tax credit, or other ways to save money, visit our Expert Advice page.

Childcare Tax Breaks

by breedlove March 30, 2012

If you hired a caregiver for your dependent child (or parent) in 2011, you may be entitled to the Child or Dependent Care Tax Credit.  Qualifying expenses include wages paid to caregivers, taxes paid on those wages, fees paid to a placement agency to help you find the caregiver and any daycare or daycamp fees (overnight camps may not be included).

 

You can itemize up to $3,000 per dependent per year (up to a maximum of $6,000).  If you utilized a Flexible Spending Account, you'll have to deduct those funds from your total.

 

To qualify for the tax credit, your child(ren) must be under age 13 and you must pass the "work-related test," which means that the care expenses were necessary so that you and your spouse can work, look for work or go to school full-time. 

 

The expenses are itemized on Form 2441 and included with your federal income tax return, which is due April 17, 2012.  Click here for more information about tax breaks for care-related expenses.

 

 

Child or Dependent Care Tax Credit

by breedlove March 31, 2011

Families who have care-related expenses for qualified dependents are able to file for the federal Child or Dependent Care Tax Credit on Form 2441 with their 1040.  There is no income restriction on this tax credit, but both parents must work, be looking for work or be full-time students.

 

QUALIFYING EXPENSES

Itemizable expenses include: 

  1. Wages paid to a caregiver;
  2. Employer taxes paid on those wages;
  3. Fees paid to a placement agency in order to find the caregiver;
  4. Fees paid to a daycare or daycamp (overnight camps do not qualify).

 

EXPENSE LIMITS

Families with one child under age 13 can itemize up to $3,000 per year while families with two or more children can itemize up to $6,000 per year.

 

TAX CREDIT PERCENTAGE

The tax credit percentage is based on the family's adjusted gross income.  Most families will get a 20% credit, which yields a direct tax reduction of $600 per year (for one child) or $1,200 per year (for two or more children).

 

FEDERAL EMPLOYER IDENTIFICATION NUMBER (EIN)

If you have a nanny, in order to take the credit you will need to have obtained a Federal EIN.  That number should be applied to the nanny's wages and the employer taxes for that nanny.  If you itemize fees paid to an agency or daycare, those expenses would utilize the companies' EIN (Note: if you've already reached your expense limit with the nanny's wages, there is no need to chase down these business EINs).  In addition, you'll need to make sure you follow the other federal and state nanny tax obligations.

 

Let us know if you have any questions.

 



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