The tax code allows families with eligible dependents to shelter up to $5000 per year from income taxes when they deposit this money into an employer-sponsored FSA Dependent Care Account. This money may then be used, tax free, to pay the care expenses of eligible dependents. The payroll taxes associated with the care expense also qualifies under an FSA Dependent Care Account.
Most household employers's highest marginal Federal income tax rate is between 28 and 35%. Add on state and local income taxes, and the $5000 you fund to your FSA Dependent Care Account can save you $2000 a year or more in income taxes - often enough to completely fund your employer share of the "nanny taxes."
Note that your eligible dependent cannot be claimed as an eligible dependent on anyone else's tax return, and must be a legal resident of the U.S.
Nanny care or senior care expenses you incur, as well as the associated payroll taxes, are eligible expenses so long at the expense was incurred while you work or to enable you to work. To claim the expense reimbursement under a FSA Dependent Care Account you must have the tax id number of the caregiver.
Don't Delay - "Open Season" usually will close at the end of November!
You generally can only enroll in a FSA Dependent Care Account arrangment during your benefits plan's Open Season or within 30 days of a 'qualifying event' such as the birth or adoption of a child.
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