How to Claim Nanny Tax Benefits and Reduce Your Costs

Jan 9, 2025 | Household Employee Management, Household Payroll & Taxes, Tax Season

Are you a working parent with a nanny? You may be eligible for significant tax breaks. Let’s break down the two main options:

1. Dependent Care Flexible Spending Account (FSA)

What it is: A pre-tax savings account offered through your employer specifically for dependent care expenses like childcare.
2025 Limit: Up to $5,000 per year.
How it saves: Depending on your tax bracket, you could save around $2,000 annually.
Key Requirement: You must pay your nanny legally to qualify for this benefit.

2. Child and Dependent Care Credit

Eligibility: Families with two working parents or a single parent working or in school.
2024 Credit: Up to $3,000 in childcare expenses for one child, $6,000 for two or more.
Income Limit: The credit phases out for higher-income families. Most families will receive a 20% credit on expenses ($600 for one child or $1,200 for two or more).
Filing: Use IRS Form 2441 to claim the credit.

How to Maximize Your Savings

Legal Pay: Ensure your nanny is paid legally to qualify for these benefits.
Eligible Expenses: Nanny’s wages, taxes paid on their wages, backup care, and placement agency fees.
Possible Strategy: Consult with your tax advisor for the best course of action for your situation. In general, you may want to:
- One Child: Prioritize the Dependent Care FSA.
- Two or More Children: Combine the FSA and Child and Dependent Care Credit.

You can’t claim the same wages for both the Dependent Care FSA and the Child and Dependent Care Credit. If you paid your nanny more than $5,000 during the year, you can use your Dependent Care FSA first and then apply any leftover wages to the Child and Dependent Care Credit. By understanding these tax benefits and ensuring legal payment for your nanny, you can significantly reduce your childcare costs.

Need More Information?

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