What Nanny Tax Deductions Can I Claim When Paying My Nanny Legally?

Jan 19, 2023 | Household Payroll & Taxes, Tax Season

If you’ve hired a nanny, there are two nanny tax deductions you may be eligible to take.

Child care is costly but there are several ways parents can reduce the costs of paying a nanny by lowering their personal tax obligations. When paying your nanny legally, you can take advantage of tax credits to save money.

If you’ve hired a nanny, there are two nanny tax deductions you may be eligible to take.

1. Dependent Care FSA

Your nanny expenses can be put into dependent care FSA account which is a type of flexible spending account (FSA). In 2022 and 2023, the maximum you can contribute to your FSA for dependent child care is $5,000. Your contribution is pre-tax dollars which, depending on your marginal tax rate, can save you about $2,000 in 2023. The dependent care FSA is a smart way to take advantage of tax deductions for nanny expenses. You will need to pay your nanny legally to contribute to a dependent care FSA.

2. Child and dependent care credit

Families with two working parents can claim up to $3,000 in childcare expenses for one child and up to $6,000 for two or more children in 2022. If your adjusted gross income is over $43,000, the maximum credit you can claim for your nanny’s pay is 20% of your employment-related expenses. For those families with an adjusted gross income over $43,000, the tax credit is $600 for one child and $1,200 for two or more children.

In order to take advantage of this tax deduction for a babysitter in your home, you will file IRS Form 2441.

How to qualify for nanny tax deductions

First and foremost, you must pay your nanny legally in the year that you are claiming the deductions. GTM can ensure that your nanny is paid legally, taking out required taxes and providing a record of legal pay.

Your child or children must be under the age of 13 and your childcare expenses are the result of both parents working, looking for work, or are full-time students.

Expenses that are eligible to deduct are your nanny’s pay, pay to a backup childcare provider, taxes you pay on your nanny’s wages earned, and expenses paid to a nanny placement agency.

How to maximize your nanny tax credits

Your best option if you have one child is to use the dependent care FSA. If you do not have access to an FSA then you would use the child or dependent care tax credit for your nanny expenses.

You may be eligible to use both tax breaks if you have two or more children. First, maximize your contribution to your dependent care FSA account. If you have additional nanny expenses, you can apply them to the childcare tax credit. Given the cost of a full-time nanny, it is highly likely that you will have additional expenses to apply.

Let GTM handle your nanny taxes

If you want to make sure you take advantage of all the tax deductions you qualify for, GTM Payroll Services can help. Our team of household employment tax experts help set you up for success in 2023. Call (800) 929-9213 for a complimentary, no-obligation consultation, or schedule time with us at your convenience. We’ll answer your questions, discuss your obligations as a household employer, and show you how GTM Payroll can make nanny taxes easy.