Saving Money on Child Care!

Here’s a question for those of you with children; did you know that if you pay a babysitter or other childcare professional over $1900 a year, you have to pay employer taxes as well? While this additional expense can cause a lot of people to worry that they can’t afford at-home childcare, it’s definitely not the complete truth. There are a number of ways to offset this employer tax liability and even, in some cases, save money. With that in mind,  Take a look at some of the suggestions we have for you below. Enjoy.

First, you can enroll in a Dependent Care Account. This is also known as a Flexible Spending Account and many employers have this option that you can take during open enrollment. It allows you to contribute up to $5000 to help pay for child care expenses and helps you to skip federal income taxes, Social Security and Medicare taxes and state income taxes on that money as well. Depending on your tax bracket it could save you up to $2000 a year.

Then there’s also the Tax credit for Child or Dependent Care. If you don’t have the ability to get the Dependent Care Account you can use IRS form 2441 and claim up to $3000 in child care expenses for one child or to $6000 if you have two or more children. The savings are based on your  income and can translate into savings of $600 if you’re claiming for one child and up to $1200 for two or more.

Even better, if you have 2 children or more and you have access to a Dependent Care Account, you can use the full $5000 here and then also claim an additional $1000 on the Tax Credit for Child or Dependent Care account for other expenses. This can save you an extra $200 a year.

While this isn’t a federal government program, you might consider sharing a nanny with other families in your neighborhood. Simply put, you join forces with other families and hire a nanny together to watch all of your kids. All of the families will split the cost of the nanny’s wages of course but, in the eyes of the IRS, all families will still be separate employers and pay employer taxes. (Be aware that all families and sharing the expenses must also be legally declaring them as well as declaring their employer status with the IRS.)

Another option is to compensate your childcare provider with non-taxable compensation. Here’s the thing, any wages you pay for your caregiver must be taxed but if you compensate them with something that’s non-taxable neither you nor your sitter will have to pay taxes on that money. For example, you can pay their tuition and books if they’re a college student, contributing upwards of $5250 towards the cost. You can also pay their public transportation costs as well as their parking costs, and more. All of these are non-taxable ways of paying and will help you to avoid paying any taxes, at least for that portion of their pay.

In the end you simply have to strategically structure your payroll and take advantage of any tax breaks so that you can to minimize your family’s tax liabilities and, in many cases, save some money. It might take a little bit of time but it’s certainly better than paying a large amount of cash to the federal government.