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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.