by Stephanie Breedlove
Families that hire someone
to care for their children are understandably focused on finding the perfect
person. So when the time comes to address payroll and employer taxes, it's easy
to become overwhelmed.
But the truth is that a
little work up front is worth it because most families will qualify for the Tax
Credit for Child or Dependent Care, which can offset a significant portion of
their household employer payroll taxes.
About the Tax Credit
The Tax Credit for Child or Dependent Care is available to families if they have child or dependent care-related expenses. The wages paid to a nanny or personal attendant qualify
because their services are for the well-being and protection of the family's
dependent (under age 13). Other qualifying expenses include:
- Taxes paid on the nanny or personal attendant's wages;
- Fees paid to find a caregiver for the child or dependent;
- Dues paid to a daycare facility;
- Tuition for a day camp (overnight camps are excluded).
There are no income
restrictions for claiming the Tax Credit for Child or Dependent Care. Families
just have to meet the work-related test – meaning care is needed for their
child or dependent because both spouses work, are looking for work or are
How to Claim the Credit and What to Expect
Families claim the Tax
Credit for Child and Dependent Care by filing IRS Form 2441 with their personal
federal income tax return. The form asks for the care-related expenses the
family incurred for the year and calculates the tax savings based on a
percentage determined by the family's income level.
The expense limit is $3,000
for one dependent or $6,000 for two or more dependents. Because most families
will receive a 20% tax credit on their care-related expenses, they can expect
to see an annual savings of up to $600 if they have one child and $1,200 if
they have two or more children.
A Real-Life Example
The Jones family lives in
Texas and hires a nanny to take care of their 5-year-old twin daughters. They
pay their nanny $28,000, withhold the appropriate taxes throughout the year and
pay the subsequent employer taxes. Their cost as a household employer is the
Gross Wages for the Nanny: $28,000
Social Security Taxes: $1,736
Medicare Taxes: $406
Unemployment Insurance Taxes: $285
Total Employer Taxes: $2,427
Total Cost (before tax breaks): $30,427
But because the Jones' both
work full-time and their daughters are under 13 years of age, they qualify for
the Tax Credit for Child and Dependent Care. Given their income level, the
Jones' can receive a 20% credit on $6,000 of child care expenses. This credits
$1,200 back to the Jones', making their employer costs shrink to $1,227 or nearly
half of what they would have paid without the tax credit!
As you can see, families
should look at the Tax Credit for Child and Dependent Care as a reward for the
hard work they put into successfully managing the household payroll and tax
process. And most parents would agree, having an extra $600 to $1,200 during
tax season can certainly be put toward the food, clothes and toys their kids
want and need.
Stephanie Breedlove is the
VP of Care.com Homepay, where she helps families to simplify and understand their responsibilities as employers of caregivers or household workers. She is
one of the country's leading experts on household employment tax and labor law.
When she isn't busy keeping up with her two grown boys, Stephanie enjoys
spending time outdoors in and around the Austin area hiking, biking and