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Dependent care FSA

Posted: Sat Jul 27, 2019 8:48 pm
by OCDinvestor
We will be hiring a nanny to take care of our young baby, who will care for him at my wife business-- she's a W2 employee.

Through my W2 employer, I have the option of a dependent care FSA. How does this work with respect to a nanny who we are planning to pay off the books? Can we pay off the books with this vehicle?

If not, how do people go about formally paying a nanny on the books?

Re: Dependent care FSA

Posted: Sat Jul 27, 2019 8:55 pm
by Bucknuts
You can not use a dependent care FSA if you plan to pay someone under the table. I personally believe you should not pay the nanny under the table for a few reasons. First, you get to take advantage of the FSA. Second, the nanny accrues time in social security for her future. Third, under the table is illegal. It is definitely more work getting started paying them legitimately. There are a number of threads on here that detail the steps you need to take. We have a nanny and pay her through a payroll company. We use Surepayroll. They have been very easy to use and help to make sure you have all the proper insurance and take care of having all the proper tax paperwork done. They direct deposit a check to the nanny each wee and provide all the necessary paperwork such as paystub, etc. They charge ~$50/month.

Congrats on the new baby
Bucknuts

Re: Dependent care FSA

Posted: Sat Jul 27, 2019 8:59 pm
by Miguelito
You cannot use FSA for a nanny off the books.

To go on the books, you need to become a "household employer." You need to get worker's comp and withhold FICA (including your portion as an employer). You don't have to withhold Federal & state tax, but need to explain clearly to your employee the he/she will be responsible for that. You also have to track all pay stubs. I did it all myself and it was a PITA to get it set up. After that, it's not so bad. If you do all that, you can use yourself as the entity who was paid the funds against the FSA reimbursements.

Re: Dependent care FSA

Posted: Sat Jul 27, 2019 9:16 pm
by noraz123
OCDinvestor wrote:
Sat Jul 27, 2019 8:48 pm
We will be hiring a nanny to take care of our young baby, who will care for him at my wife business-- she's a W2 employee.

Through my W2 employer, I have the option of a dependent care FSA. How does this work with respect to a nanny who we are planning to pay off the books? Can we pay off the books with this vehicle?

If not, how do people go about formally paying a nanny on the books?
Two thoughts. First, you can claim the child care tax credit, regardless of your income, in lieu of the FSA. Your tax credit will be reduced to a limit based on your income, but does not phase out. This may be the easiest. It is up to your nanny to report his/her earning to IRS.

Second, all that my employer's FSA requires is an invoice (needs to show name of child, hours of care, costs, and provider) to be reimbursed. No tax ID is required. We pay our daycare provider on the books through my employer's FSA, and I am surprised that they do not ask for my daycare provider's tax ID. So if your nanny is willing to invoice you (our daycare provider just emails us a spreadsheet), you could submit this for reimbursement. It would still be up to your nanny to report this as income, which seemingly s/he does not want to do.

From what I remember, if you're in a high(er) tax bracket, you save a bit more with the FSA since it comes out of your paycheck, it can avoid FICA, and (or just) medicare tax.

Re: Dependent care FSA

Posted: Sat Jul 27, 2019 9:51 pm
by Bucknuts
We max our dependent care FSA $5000/year. Because we are in a high tax bracket this saves $2,000/yr. Also we don't qualify for the child tax credit due to phaseout. We pay a slightly higher wage due to the fact that it is taxable and so it works out as about a wash in total cost. But if you are paying legit then it makes sense to use the FSA.

Re: Dependent care FSA

Posted: Sun Jul 28, 2019 11:14 am
by lakpr
Bucknuts wrote:
Sat Jul 27, 2019 9:51 pm
We max our dependent care FSA $5000/year. Because we are in a high tax bracket this saves $2,000/yr. Also we don't qualify for the child tax credit due to phaseout.
The child tax Dependent Care credit is not phased out completely, you get $200 minimum. Just saying ... our combined income is mid 200's and we have the same issue as above. Max out the Dependent Care FSA but still get $200 on the credit.
Edited, thanks to nolesrule for correcting me.

Re: Dependent care FSA

Posted: Sun Jul 28, 2019 12:17 pm
by Bucknuts
Thanks for the clarification on the tax credit

Re: Dependent care FSA

Posted: Sun Jul 28, 2019 3:08 pm
by nolesrule
lakpr wrote:
Sun Jul 28, 2019 11:14 am
Bucknuts wrote:
Sat Jul 27, 2019 9:51 pm
We max our dependent care FSA $5000/year. Because we are in a high tax bracket this saves $2,000/yr. Also we don't qualify for the child tax credit due to phaseout.
The child tax credit is not phased out completely, you get $200 minimum. Just saying ... our combined income is mid 200's and we have the same issue as above. Max out the Dependent Care FSA but still get $200 on the child tax credit.
You are referring to the Dependent Care credit, not the child tax credit (the latter is the one you get just for having a children, and it does phase out). If you only have 1 child and use the DC FSA for more than $3000 in reimbursements, you cannot take the dependent care credit, because you can only claim on the $3k - reimbursemenets from the DC FSA. If you have 2 or more children, then you can still get the $200 credit if you have at least $6000 in expenses and use the DC FSA for $5000.

Re: Dependent care FSA

Posted: Sun Jul 28, 2019 3:42 pm
by lakpr
nolesrule wrote:
Sun Jul 28, 2019 3:08 pm
lakpr wrote:
Sun Jul 28, 2019 11:14 am
Bucknuts wrote:
Sat Jul 27, 2019 9:51 pm
We max our dependent care FSA $5000/year. Because we are in a high tax bracket this saves $2,000/yr. Also we don't qualify for the child tax credit due to phaseout.
The child tax credit is not phased out completely, you get $200 minimum. Just saying ... our combined income is mid 200's and we have the same issue as above. Max out the Dependent Care FSA but still get $200 on the child tax credit.
You are referring to the Dependent Care credit, not the child tax credit (the latter is the one you get just for having a children, and it does phase out). If you only have 1 child and use the DC FSA for more than $3000 in reimbursements, you cannot take the dependent care credit, because you can only claim on the $3k - reimbursemenets from the DC FSA. If you have 2 or more children, then you can still get the $200 credit if you have at least $6000 in expenses and use the DC FSA for $5000.
Duh! :oops: Yes I did mean the Dependent Care credit, what was I thinking?