Federal Tax Supports for Employees with Child Care Expenses

Become an advocate to inform your employees about these opportunities.

 

Support Child Care with Tax-Free Income

Salary reduction through Dependent Care Assistance Plans (DCAPs) allows employees to set aside a certain portion of their wages for child care expenses through a payroll deduction. The deducted funds are held in the employee's DCAP account as reimbursable funds for qualified child care expenses. After the employee accumulates dependent care expense funds in the account, receipts for child expenses are submitted to the account administrator for reimbursement. The account administrator may reimburse the employee for costs up to a maximum of $5,000 per year for household child care expenses. Unused set-aside amounts in the account are generally lost if reimbursement has not been requested by the end of the plan year.

Neither the employer or the employee pay payroll taxes on the amount of salary set aside for child care reimbursement.

A DCAP salary-reduction can be offered alone or as part of a flexible benefit program. For more information, see IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits Page 9 and consult your tax advisor.

Tax-free employer contributions to an employees dependent care assistance plan also supports the employee with child care costs. This exclusion is subject to the same $5,000 limitations as the employee wage deferral (e.g. the wage deferral and the employer contribution must not exceed $5,000 a year).  For more information see IRS Code Section 129 and consult your tax advisor.

 

Tax Credits for Employees with Children 

Credit for child and dependent care expenses help employees mitigate the cost of child care.  This tax credit is applied for on employees' personal income tax returns when the child care expense enables them work or look for work. See IRS Publication 503 Child and Dependent Care Expenses for further information and consult your tax advisor.

IRS Form 2441 is attached to the individual taxpayer's return to calculate the child care tax credit.  IRS Form 2441 Instructions provides detailed information about the calculation and limitations.  Form 2441 also incorporates Dependent Care Benefits that may have been received:

  • Amounts the employer paid directly to the employee or a child care provider to allow the parent work or look for work,
  • The fair market value of care at a child care facility provided or sponsored by the employer, and
  • Pre-tax contributions under a dependent care flexible spending arrangement (DCAP or FSA).

Child Tax Credit (CTC) is $2,000 per qualifying child under age 17 at the end of the tax year.  Each child must have a valid social security number to qualify for the credit.

Beginning in 2018 CTC will phase-out according to the taxpayer's income.  For further information see Publication 972 Child Tax Credit and consult your tax advisor.