Good news! Household employers with dependent care expenses are entitled to tax breaks – regardless of their income level – as long as both spouses are either employed or a full-time student.  For most families, the tax breaks offset most – if not all – of the employer tax costs.  In some cases, families even come out ahead by paying legally!

There are two tax breaks available to household employers who pay legally:

• Dependent Care Account (also commonly called a Flexible Spending Account). Most businesses allow their employees to contribute up to $5,000 of their pre-tax earnings to a Dependent Care Account to help pay for childcare expenses. This means there is no federal income tax, state income tax or FICA taxes on that $5,000 of your income. Depending on your tax bracket, this deduction will save you about $2,100-$2,300 per year which will offset – sometimes exceed – your employer tax liability. Companies have considerable leeway in how these accounts are administered; check with your company’s HR department or Accounting department to learn about your enrollment options. Once set up, we can provide you with the paperwork you'll need to take advantage of this tax break.

• Child Care Tax Credit. If you don’t have access to a Dependent Care Account, you can claim the Tax Credit for Child or Dependent Care (IRS Form 2441) on your personal federal income tax return at year end. This tax credit saves $600 for families with one dependent or $1,200 for families with two or more dependents.

IF YOU HAVE 2 OR MORE DEPENDENTS: please note that the government allows families with 2 or more dependents to itemize up to $6,000 of dependent care expenses.  Therefore, if you use $5,000 for your Dependent Care Account, you may have an additional $1,000 in excess expenses that can be claimed on Form 2441, which would save you an additional $200 per year  off your tax bill.

For an estimate of your tax breaks, give us a call or use our Employer Budget Calculator.