{"id":26831,"date":"2021-03-18T11:42:22","date_gmt":"2021-03-18T15:42:22","guid":{"rendered":"https:\/\/gtm.com\/household\/?p=26831"},"modified":"2021-10-28T12:03:51","modified_gmt":"2021-10-28T16:03:51","slug":"paying-nanny-legally-2021","status":"publish","type":"post","link":"https:\/\/gtm.com\/household\/paying-nanny-legally-2021\/","title":{"rendered":"How to Pay Your Nanny Legally in 2021 and Save Money"},"content":{"rendered":"
\"paying-nanny-legally-2021\"

It’s always the right thing to do, but with expanded childcare tax credits and increased contribution limits on Dependent Care FSAs through the American Rescue Plan, paying your nanny legally may now be cheaper than “under the table.”<\/p><\/div>\n

Some of the financial provisions that are part of the American Rescue Plan<\/a> help reduce childcare costs for families. They also provide a significant incentive for household employers to pay their nanny legally as tax breaks are not available to families who pay “off the books.” If there was ever a time to start paying your nanny the right way, it is now.<\/p>\n

Let\u2019s take a look at key parts of the plan and how they cut the costs of childcare and incentivize legal pay.<\/p>\n

Increased contribution limits to your Dependent Care FSA<\/h2>\n

Many companies offer their employees some type of dependent care assistance program in the form of a flexible spending account (FSA). In past years, you could contribute up to $5,000 in tax-free money to a Dependent Care FSA<\/a> and then get reimbursed for qualified expenses like wages paid to a nanny. This type of account lowers your taxable income so you pay less in Social Security, Medicare, and federal income taxes (state taxes too if applicable).<\/p>\n

The American Rescue Plan boosts the dependent care FSA limit to $10,500 for 2021. Depending on a few factors \u2013 like where you live and your total income<\/a> \u2013 you could save anywhere from 35 to 46 percent on the funds you place in a dependent care FSA. That means if you have at least $10,500 in childcare expenses (again this includes wages paid to a nanny) and max out your FSA and you could save $3,300 – $4,700.<\/p>\n

Check with your employer\u2019s human resources department to see if they plan to increase your contribution limit to a Dependent Care FSA.<\/p>\n

Expanded Child and Dependent Care Tax Credit<\/h2>\n

Under the American Rescue Plan, the Child and Dependent Care Tax Credit<\/a> will increase from $3,000 to $8,000 for a family with one child. For families with two or more children, the credit increases from $6,000 to $16,000. These increases are for the 2021 tax year and will be reflected when you file your tax return next year.<\/p>\n

A nanny\u2019s wages are considered a qualifying expense under the Child and Dependent Care Tax Credit.<\/p>\n

The amount of the credit gradually decreases based on a family\u2019s household income from 50 percent of qualifying expenses for households with an adjusted gross income<\/a> (AGI) of less than $125,000 to one percent for households with an AGI of $440,000.<\/p>\n

We break down the income brackets and percentages here<\/a>.<\/p>\n

That means a family with an AGI of less than $125,000 would get a tax credit of $4,000 for one child or $8,000 for two or more children.<\/p>\n

Right now most families get a 20 percent credit of childcare expenses ($600 for one child or $1,200 for two or more children). With the American Rescue Plan, a family with an AGI of $185,000 – $400,000 can get that same 20 percent credit but now would get $1,600 for one child and $3,200 for two or more children.<\/p>\n

Maximizing your tax savings<\/h2>\n

In 2021, if you have two or more children, you can apply up to $16,000 of childcare expenses towards tax breaks (Dependent Care FSA and the Child and Dependent Care FSA). The maximum is $8,000 for one child.<\/p>\n

If you have a nanny caring for your two children, you can apply $10,500 of their wages to your Dependent Care FSA and use the remaining $5,500 for the Child and Dependent Care Tax Credit.<\/p>\n

Let\u2019s say you employ a full-time nanny earning more than $16,000, file as married filing jointly, and have an AGI between $185,000 and $400,000.<\/p>\n

For one child, your tax savings would be:<\/p>\n