Everything Families Need to Know about the Child and Dependent Care Tax Credit

Feb 7, 2025 | GTM Blog, Household Payroll & Taxes, Tax & Wage Laws

Families can take advantage of the Child and Dependent Care Tax Credit to save on childcare expenses. Wages paid to a nanny qualify for the credit. Here is everything a family with a nanny or other childcare needs to know about claiming this tax credit on their personal tax return.

One of the benefits of paying your nanny legally is taking advantage of the tax breaks from Dependent Care FSAs and the Child and Dependent Care Tax Credit. These tax savings can significantly reduce – and possibly eliminate – your nanny tax obligation, making it even more attractive to pay your nanny “on the books” rather than risk paying them “under the table.”

Wages paid to a nanny are a qualifying expense for a Dependent Care FSA and the Child and Dependent Care Tax Credit.

Here’s everything you need to know about the Child and Dependent Care Tax Credit. We’ll focus on families who have hired a nanny to provide in-home childcare or may have some hybrid childcare situation like a combination of nanny care, daycare centers, summer camps, and/or after-school care. Read the complete IRS FAQs for information on claiming other dependents under the tax credit.

Child and Dependent Care Tax Credit Overview

The Child and Dependent Care Credit is a tax credit that may help you pay for the care of eligible children and other dependents. The credit is calculated based on your income and a percentage of expenses you incur for the care of your children to enable you to go to work, look for work, or attend school (and your spouse if filing jointly). Your federal income tax may be reduced by claiming the credit for child and dependent care expenses on your tax return.

You can claim between 20% to 35% of your childcare expenses up to a maximum of $3,000 in expenses for one child or $6,000 in expenses for two or more children. When claiming the maximum in expenses, your credit will be between $600 to $1,050 for one child and $1,200 to $2,100 for two or more children.

Am I eligible to claim the Child and Dependent Care Tax Credit?

You can claim this credit if you (or your spouse in the case of a joint return) pay someone to care for one or more children for you to work or look for work, and your income level is within the income limits set for the credit. You must file a joint return to claim the credit if you are married. However, if you are legally separated or living apart from your spouse, you may be able to file a separate return and still claim the credit. If you or your spouse were a full-time student, see IRS Publication 503, Child and Dependent Care Expenses, for more information on eligibility.

How do I claim the Child and Dependent Care Tax Credit?

To claim the credit, you must complete Form 2441, Child and Dependent Care Expenses, and include the form when you file your federal income tax return. To complete the form to claim the credit, you must provide each child’s Social Security Number (SSN).

What information do I need from my nanny to claim the credit?

You must identify all persons (like a nanny) or organizations (daycare centers, summer camps, etc.) that provided care for your child. To identify a nanny, you must give their name, address, and SSN or Individual Taxpayer Identification Number (ITIN). You can request this information with Form W-10, Dependent Care Provider’s Identification and Certification. Your credit may not be allowed if your nanny’s information is incorrect or incomplete. However, if you can show that you used due diligence in trying to supply the information, you can still claim the credit.

You should keep this information with your tax records.

Who is a qualifying person?

A qualifying child is defined as your dependent under age 13 when the care is provided.

My spouse was out of work during the year. Can we still claim the Child and Dependent Care Tax Credit?

Maybe. Your spouse who is out of work during the year must be actively looking for employment, and the work-related expenses must be incurred so that you and your spouse can work or look for work. You (and your spouse in the case of a joint return) must have earned income to claim the credit. Earned income includes wages, salaries, tips, other taxable employee compensation, and net earnings from self-employment. A net loss from self-employment reduces earned income. Earned income includes any strike benefits and disability pay you report as wages. Unemployment compensation is not included in earned income.

The work-related expenses considered in calculating the credit cannot exceed your earned income. If you are married and filing a joint return, your work-related expenses on your joint return are limited to the lesser of your or your spouse’s earned income.

What qualifies as a work-related expense?

A work-related expense is an amount you (or your spouse in the case of a joint return) pay for the care of a child or household services if at least part of the services is for the care of a child for you to work or look for work. Your work can be for others or in your own business or partnership. It can be full- or part-time. It also includes actively looking for work. However, you cannot take this credit if you do not find a job and have no earned income for the year.

Services that may qualify as work-related expenses include nanny-share arrangements, daycare, preschool, and day camp for your children, and the care can be provided either at or outside your home.

I pay my mother to watch my children during the day. Does this count as a work-related expense?

Yes, unless you can claim your mother as a dependent.

You can also count some work-related payments you make to other relatives, even if they live in your house. However, don’t count any amounts you pay to:

A person you (or your spouse in the case of a joint return) can claim as a dependent;
Your child who was under age 19 at the end of the year, even if the child isn’t your dependent;
A person who was your spouse at any time during the year; or
The parent of your qualifying person, if your qualifying person is also your child and under age 13.

My child receives care outside my home so that I can work. Does this count as a work-related expense?

Maybe. The care must be for your child under 13 to count as a work-related expense. Care provided outside the taxpayer’s home can be in a center or another person’s home. If a dependent care center provides the care, the center must comply with all state and local regulations that apply to centers. A dependent care center is a place that provides care for more than six persons (other than persons who live there) and receives a fee, payment, or grant for providing services for any of those persons, even if the center is not run for profit.

My child will be attending a week of overnight camp. Does that camp count as a work-related expense?

No. The cost of an overnight camp does not count as a work-related expense.

My child is enrolled in a private kindergarten. Are the expenses to attend the private kindergarten work-related expenses?

No. Attending kindergarten or a higher grade level is not an expense for care and, therefore, is not a work-related expense.

I send my child to after-school care. Are these expenses work-related expenses?

Maybe. Expenses paid for before- or after-school care of a child in kindergarten or a higher-grade level are expenses for care and, therefore, are work-related expenses, provided all other conditions are satisfied (for example, the expenses allow you to work or look for work).

GTM can help

Ready to pay your nanny on the books so you can take advantage of the Child and Dependent Care Tax Credit and a Dependent Care FSAs? Call us at (800) 929-9213 to get started or for your complimentary, no-obligation consultation. A household employment expert will answer all your questions about hiring and employing a nanny to work in your home. You can also schedule time with us at your convenience.