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How tax breaks make hiring a summer nanny an affordable option for families

Using a Dependent Care Account or the child care tax credit may save you more than you owe in taxes

Tax breaks make hiring a summer nanny an affordable option

As the school year ends, you’re likely facing the decision of what to do with your kids for the summer break. With after-school care no longer an option and day care and summer camp spots in high-demand, many opt for a nanny to provide high-quality one-on-one care in their home. And due to the way tax and payroll laws work out, hiring a nanny can be a very cost-effective choice.

You see, families that hire help on a short-term basis have a unique tax advantage: Your employer taxes are tied to the wages paid to the summer nanny, so your tax obligation is relatively low since the nanny only works for about three months. Yet you’re still able to take full advantage of the child care tax breaks, which almost always results in a complete offset of tax costs.

A budgeting example

Say a family hires a summer nanny for $500 per week for 12 weeks to watch their two kids. The wages they pay the nanny come out to $6,000, but at the end of the summer, their total employer cost looks like this:

Gross Wages Paid to the Nanny

   $6,000

Social Security Taxes

+ $372

Medicare Taxes

+ $87

Unemployment Insurance Taxes

+ $156

Total Employment Taxes

   $615

Total Cost to the Family (before tax breaks)

   $6,615

By paying their nanny on the books, the family qualifies for tax breaks because each parent works and both of their children are under 13. The family is enrolled in a Dependent Care Account (a type of Flexible Spending Account, or FSA) through their employer, which allows them to pay for up to $10,500 of child care expenses tax-free.
 

Cost Before Tax Breaks  $6,615
Savings from FSA– $2,400 (based on the family’s tax bracket)
Total Cost of Summer Nanny  $4,215

As you can see, the family is now saving $1,785 by paying their summer nanny on the books!

It’s important to note that the IRS considers the current COVID-19 landscape to be a life-changing event – as well a change in child care needs. That means you can enroll in a Dependent Care Account mid-year if you hire a summer nanny.

What if the family doesn’t have access to an FSA?

You can still use the child care tax credit (IRS Form 2441) if you make less than $440,000 for the year. Your can apply up to $16,000 to this tax credit and your savings will vary depending on your income. Many families will get a 20% tax break so we’ll assume the same is true for the family in this scenario.
 

Cost Before Tax Breaks  $6,615
Savings from Child Care Tax Credit– $1,200
Total Cost of Summer Nanny  $5,415

In this scenario, you still come out ahead by $585. If you paid your summer nanny under the table, you would not be eligible for either of these tax breaks.

If you’re trying to budget for summer care, crunch the numbers yourself and see how affordable it can be for you and how beneficial it could be for your kids.

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