August 15, 2007,
N.K. asks from Chicago, IL on August 11, 2007
Childcare Expenses and Taxes
When I return to work this fall (I'm a teacher) my 6 month old son will be staying in our home with a babysitter. I "assumed" that the money we will be paying the babysitter would be tax deductible and maybe even eligible for my employer's childcare flex spending option, which I can sign up for in December. Does anyone know if this is correct? I really want to keep the baby in our home for the first year, even though it will be a big financial challenge.
M. answers from Chicago on August 12, 2007
I know how your feel, I too am a teacher and I went back to work when my daughter was 3 months old, she was a June baby so I went back in August. What I learned was this, in order to claim it on your taxes, your child care provider has to pay taxes on what you pay her because you have to report her social security number on your tax form, so she has to know that up front.
Also, you can use your flexible spending account for that, when I taught in Texas, I did. My current district does not have one.
I hoped this helped.
mother of 2
4th grade teacher
J. answers from Chicago on August 11, 2007
I hate to tell you this, but the small amount you can deduct/save will probably be offset by the social security taxes you will have to pay for your nanny.
But yes, you should be able to use the flex spending option. There are online calculators that you can use to figure out whether to use a flex account or not, but keep in mind that it's one or the other - you can use flex spending and pay with pretax dollars, or you can deduct after the fact on your tax return (it works out about the same for us, so we don't bother with the flex account stuff.)
L.H. answers from Chicago on August 11, 2007
I'm not an expert on this. But, we were able to use a flex account for our nanny, but we also had to file with the state and pay state and local taxes (unemployment, social security, etc.). I find the whole thing very complicated, and it does increase the expense.
R.K. answers from Chicago on August 13, 2007
In response to one of the posters, when I went to an all-day conference, a DCFS Supervisor told us that daycare providers do not have the option of allowing you to claim the payments on your taxes. They, by law, are required to disclose all of their income to the IRS and provide you with either their social security number of a EIN number so that you can claim the payments on your taxes, if you qualify for the EITC. To not disclose their income if tax evasion, according to both this supervisor and my BF who is a CPA. If your provider does not want to provide you with one of these options, I would be leery of using them.
J.S. answers from Chicago on August 11, 2007
I have previously done child care in my home. So my opinion comes from a provider's viewpoint, as well as a parent's. As a mom, I know how much it helps out being able to claim any and all childcare/school expenses. So, when I was watching children, I always made it an option that was 100% up to the family. My thoughts were if I am earining an income, I should technically have to claim it. I know there are home providers who REFUSE to allow families to claim it on their taxes, and personally, it makes me a little weary. With her allowing you to claim it, and therefore having to claim taxes, she too can write other stuff off, such as gas mileage, and expenses for your child(ren) for any trips, meals, etc. Yeah, she may end up having to pay some taxes, but it is only fair that you be able to claim it, since you are the one putting out the money for your child's care.
Good luck and congrats on the new baby!!
A.L. answers from Chicago on August 11, 2007
That is correct. You can sign up for your FSA, flexible spending account for dependent child care. Take the maximum, or best estimated guess at how much you will spend for 2008, probably close to $3-$4k. I would suggest also paying your child care provider by check so you have a record, but also keep your own record of how much you pay out and the dates she was paid. Have her sign it and give her SS# at the end of the year, like a paid out invoice/statement.
C.S. answers from Chicago on August 15, 2007
I work in HR and my experience with this area is that you can do one or the other but you can not do both. If you use your flex plan that is pre tax money which means no tax is being taken and your savings is what ever your tax percentage is, that is if your tax rate is 20% and you sock away the max $5000 your savings is around $1000 for the year. I don't know what the tax deduction is but that is what you use if you pay your sitter with money you have paid taxes on which why you can deduct it. You have to compare which offers you the better benefit because if you do the flex plan you can not claim it on your taxes as a deduction because you did not pay taxes on it.
K.M. answers from Chicago on August 11, 2007
legally, if you are employing a babysitter on a full time basis in your home, you will actually need to pay taxes on her wage as you are hiring her as an "employee". note the word "legally".
this is why I send my kids to a home childcare vs hiring someone in my home - as they do their own taxes on the income.
as for the child care tax deduction, it's a joke. i'd have to check my tax return but it's not even more than a month's worth of childcare.
C. answers from Chicago on August 11, 2007
With having a nanny in your home, it IS typically a lot more costly and complicated (besides his being able to stay at home daily :) ) than taking him to a center or home day care. The bigger expense is because you will be paying somebody's full salary. Also, healthcare benefits may be a consideration (when I nannied, the family paid for my Unicare individual medical insurance). Also, to be legal, you'd pay employer taxes, the employer side of social security, medicare. When I nannied, the family took my portion of social security and medicare out and then I had to pay quarerly estimated tax. So it just gets complicated with all the paperwork and such. Then you could claim the child care you pay out. I'd be leary of claiming that money you pay out if you don't work it legally with paying employer taxes. To me, it's very complicated. May be worth it for 2 or 3 kids, but it wouldn't be worth it to me for one because it's more costly on top of the paperwork. I'd get a tax guy to help with being sure everything is legal and that you get all the credits entitled to you. I too have an education background (early childhood education and psychology degrees), so I started home day care (with a preschool program) last year, now that I have 2 of my own kids. I absolutely LOVE it! It feels to be the best of both worlds now. It takes a few months to get licensed, but it's not bad. The taxes are a pain, but not that bad now that we have our taxes done for us. :) Best wishes to you!!
A.R. answers from Chicago on August 11, 2007
I'm a teacher and we are able to do the childcare/flex spending option in our district.
R.A. answers from Champaign on August 11, 2007
My husband is a teacher and I am starting up my own in-house daycare as we speak. I know that the money is tax deductible, yes! You have to keep track of what you spend for that reason alone. As for your employers compensation, I am unsure. All schools have different policies! Good Luck!