When it comes to childcare, the household employer tax may seem too expensive for many families. Since the IRS considers nannies as “household employees”, hiring a nanny does bring on significant tax liability.
However, before you decide against hiring a nanny, you should know about what vital tax breaks that can, in some cases, counter the initial tax liability. In some cases, this can make hiring a nanny virtually tax-free, and you may end up earning much more tax credit than nanny tax liability!
Riveter Consulting Group, one of the most seasoned recruitment agencies in Los Angeles, California, lists down 2 ways that you can receive tax breaks when paying nanny salaries:
- Create a Flexible Savings Account (FSA)
Also known as a Dependent Care Account, this fund can be organized with the company that employs you, granted that they participate in the program. Through an FSA, you can set aside up to $5,000 of your earnings before taxes for the purpose of covering family- and dependent-related costs. Pre-tax means that this amount can’t be touched by Medicare, Social Security, Federal, or State withholdings. For home employers paying a nanny to watch over their children, this can result in as much as $2,300 of tax credit!
- Child or Dependent Care Tax Credit
Unfortunately, not all companies offer the FSA tax advantage. In this case, know that the IRS does grant an alternative tax credit known as the Child or Dependent Care Tax Credit. You can claim this on your personal income tax return by completing the 2441 IRS Form. This option provides you with a 20% tax credit on childcare expenses (i.e. nannies) of up to $3,000 per dependent. For families with more than one dependent, the expense limit doubles.
As your trusted staffing agency in California, we want you to be aware of your options. The above-mentioned options are available to home employers who hire nannies for the purpose of child care. To qualify, families must be able to provide that the nanny salary is truly a work-related expense.