Need Childcare Over Winter Break? Here’s How to Save Money
With the holiday season being upon us, it’s often a time for family, friends, togetherness and making memories. But it can also be a very stressful time of year between stretching holiday gift budgets, worrying about January credit card bills and imminent tax filing, and the hassle and stress of peak holiday travel time. Topping your list of concerns is also likely to be childcare if your school-age children have extended winter recesses and there’s no one to watch them while you’re at work.
Here’s what you can do to save money on childcare needs during winter break.
1) Use a daycare center if your work hours align with theirs.
Daycare centers are the most cost-effective temporary childcare solution if you need one. There are some drawbacks though, such as if your child gets sick then you can’t take them there and if your work schedule is erratic it can be difficult to find a daycare center that works for your needs and budget.
A temporary part-time nanny may cost more than daycare, but be the best option if your work schedule is more unpredictable or you work night shifts.
2) See if your employer offers a flexible spending account (FSA) for childcare.
You can put up to $5,000 aside pre-tax in FSA benefits. Preschool, daycare, and even certain day camp programs are eligible so long as this type of care enables you to go to work.
If your spouse has makes contribution to an FSA, be aware that total family contributions can’t be any more than $5,000. You also need to have well-organized records concerning childcare payments because you need to submit reimbursement requests to get the funds back and retain your tax benefits.
One major drawback to this method is that you need to figure out your costs ahead of time and try to contribute an amount as precisely as possible since your FSA funds have a “use it or lose it” mechanism that forfeits the funds at year-end.
3) Take advantage of the Child and Dependent Care Tax Credit.
Whether you’re using a daycare center or a temporary nanny or babysitter, you can get a tax credit of up to $3,000 in qualifying expenses for up to two children under the age of 13 ($6,000 total.) The nonrefundable tax credit is based on a percentage scaled to your income and applied to eligible childcare expenses, with a minimum of 20% and no income cap.
It’s possible to use both a FSA and take the Child and Dependent Care Credit. If you do this though, any FSA funds are applied to the eligible childcare expenses. So if you spend $1,000 on winter break childcare and used $1,000 from an FSA, you won’t get a credit. If we double this example for two eligible children and your total eligible expenses are $2,000, then you could only itemize the remaining $1,000 for the Child and Dependent Care Credit.
4) Use an agency to find a part-time nanny to save on payroll taxes.
When you have a domestic care worker on an ongoing basis like a nanny or housekeeper, you have to file a form to pay the “nanny tax” and register as a household employer. The nanny tax is the payroll taxes owed on cash wages paid to household employees, even if they’re part-time and have a contract.
However, if you pay a babysitter or nanny who is either self-employed or hired through an agency then you don’t need to register as a household employer and pay these payroll taxes. If you just need winter break childcare but are unsure if you’d fall into the zone of needing to file and pay nanny tax based on your family’s needs, using an agency to get a temporary nanny will save you the most on taxes and administrative burden. Payroll taxes are the agency’s responsibility, not yours.
Rue & Associates is available year-round to help you get the most tax benefits out of your childcare expenses and take the stress out of this large expense. Contact us today to speak to one of our friendly and professional tax law experts.