When you hire a nanny you may qualify for a childcare related personal income tax breaks. There are two popular strategies that families with child care expenses use to minimize their personal income taxes and are in addition to the Child Tax Credit, which in 2018 rose to $2000 per child and is available to families earning up to $400,000 per year.
Many families can utilize a dependent care flexible spending plan (cafeteria plan) offered by their employer for child and dependent care expenses. This may be administered by your employer or outsourced to specialty plan administrators. There is typically a payroll deduction set up annually, and you file a claim documenting eligible expenses to be reimbursed. Your human resources department can provide you with plan details.
Another strategy for nanny childcare tax breaks is the Child and Dependent Care Credit available to many parents. This tax credit for childcare can directly reduce the parent’s income taxes by between $600-$1,440 a year.
To be eligible for any nanny childcare tax breaks, the family has to legally report the wages paid to the nanny or caregiver and remit the necessary employment taxes. The family will be required to supply the Social Security Number of the nanny they employed, which of course creates a paper trail for both parties. Many families find that the tax credits for childcare offset the cost of the payroll taxes for the nanny, thus easing the financial burden of tax compliance.
