Are there any household employer tax breaks an employer can take advantage of?
There are two popular household employer tax breaks for families to make care more affordable. A family may only use up to $6000 paid to a nanny or senior caregiver (qualified expenses) in any particular year. These tax breaks are not income-restricted. They do require, however, that both spouses must pass the “work-related expense test.” You (and your spouse if filing jointly) need to be employed or be a full-time student and the care must be for a qualified dependent. Additionally, the family must report and pay taxes on the nanny’s or caregiver’s wages to be eligible for either tax break.
Child and Dependent Care Tax Credit:
The Child Care Credit allows you to apply the first $3000 of expenses ($6000 if you have two or more children) you paid for qualified child/dependent care towards a tax credit. For families earning over $43K in 2017, the credit is 20% of the expenses. Most nanny employers would qualify, therefore, for a $600 or $1200 tax credit.
A tax credit is not a deduction. A tax credit directly reduces the amount of tax you owe the IRS at the end of the year.
To be eligible for the IRS child care tax credit, there are a number of ‘tests’ that must be met. The main factors are: 1) the nanny or caregiver must be employed to care for a qualifying person (your dependent child under 13, disabled spouse, or other qualified disabled dependent); 2) you (and your spouse if married) must have earned income; and 3) the nanny’s care must be required so you can work.
» More Details: IRS Publication 503
Dependent Care Flexible Spending Account:
The Dependent Care Account is a pre-tax expense account that may be used to help pay for dependent care expenses that are necessary for the parents to work. To participate, the accounts must be offered by the parent’s employer as part of flexible benefit plans. The family must elect to participate during the annual ‘open season’ benefit enrollment period and specify the amount to be deducted from the payroll on a pre-tax basis. The family maximum contribution is $5,000, although, due to IRS regulations, adjustments may be made at year-end for some families earning $85,000 and over in the current year. These amounts are sheltered from Federal income taxes and most state income taxes (New Jersey and Pennsylvania tax these amounts).
A family with adjusted gross income of $80,000 per year could save ~$1300 in Federal Taxes, and perhaps another $250 – $700 in state income taxes. When available, this is generally the better choice for nanny employers and families with senior care dependent expenses.
» More Details: IRS Publication 929
Do you have two or more dependents?
Because the Internal Revenue Code allows families with 2 or more dependents to itemize up to $6,000 of dependent care expenses, if you use $5,000 for your Dependent Care Flexible Spending Account, you may have an additional $1,000 in excess expenses that can be claimed on Form 2441. This will save most families an additional $200 per year off their tax bill.
Deducting Nanny and Senior Caregiver Expenses
A nanny or senior caregiver provides childcare and is a contributing member of a household, not a business. Business owners may directly deduct wages, payroll taxes, and certain benefits provided for the businesses’ employees from their business income. Families do not have the ability to do the same on their personal income tax return. A family may only use the two techniques above to use in-home care expenses to reduce their income taxes.