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Tax Tidbit: Tax Relief for Nanny Costs

Posted by Kathleen Webb on Mar 17, 2014 7:00:00 AM

With compliance rates hovering around 10-20%, many household employers are only now beginning to seriously consider the costs and risks related to paying nannies and other household workers "on the books." While filing and paying taxes on household employees brings with it additional costs and paperwork, more families are recognizing the merits of filing as employers, and helping household workers with income tax withholding.  Nanny Household Employer

While families are doing the right thing by filing household payroll taxes, they’re also wondering: is there any tax relief for families like us?  In fact, there are two ways many family can get some tax relief of their own.  

  • Flexible Spending Accounts: Some companies will offer their employees a pre-tax dependent care account. Using this “flex spend” account, employees can set aside up to $5,000 per year from taxable salary to pay for approved child care costs. Because a flexible spending account has a "use it or lose it" rule applied to it, it is essential for families to calculate exactly how much money they are paying out in child care. Be sure you check the regulations or get help from your accountant or plan administrator to determine what nanny expenses can be reimbursed through your “flex spend” account.
  • The Child and Dependent Care Tax Credit: If your household has children under 13 years old, you can receive up to 20% of your child care costs in the form of a tax credit, subject to annual limits. To receive this credit, you must include your nanny's name and SSN and Form 2441 with your annual federal tax return.  Again, your accountant will be able to help you determine if your childcare arrangements are eligible for this credit come April 15th.

To learn more about tax credits for child and dependent care, we encourage you to have a discussion with your tax preparer. Download our free Household Employer Tax and Payroll Guide to learn more about your obligations as a household employer.

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Note: HWS provides this information as a courtesy. This is not be construed as specific tax or legal advice. HWS assumes no liability for incorrect information. For information specific to your situation you should consult the appropriate tax, legal or insurance professional of your own choice.

Topics: household employee taxes, nanny payroll, nanny tax, nanny taxes

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