Can Childcare Influence Your Tax Return?

chidcare provider coloring with child

You work full-time and hire an in-home childcare provider to take care of your two young children while you work. Did you know hiring a child care provider can influence your tax return? The good news is you can obtain Child and Dependent Care tax credit for qualifying expenses up to $6,000, the bad news is you may need to pay household employment taxes for the care provider.

How does the child care credit work?

If you hire a care provider to take care of your children while you work or are looking for work, you may obtain the following nonrefundable child & dependent care credit:

Type Requirements Benefit
Childcare expences One qualifying child under age 13 Up to $3000
Two qualifying children under age 13 Up to $6000
Child & Dependent care tax credit
(nonrefundable)
Families with AGI of $15,000 or less 35% of expenses
Families with AGI of $43,0000 or more 20% of expenses
Families with AGI between $15,000 and $43,000 21%-34% of the expenses

However, if you participate in a dependent care assistance program provided by your employer and have withheld pre-tax money, you may not include the amount you paid into the program in the credit calculation. You can find the amount on your W2, in box 10: Dependent care benefits.

Suppose you incurred care expenses of $8,000, and your W-2 shows that you have $5,000 in Box 10, then you only have a qualified expense of $1,000 to obtain the care credit (the maximum qualified care expense of $6,000, less the $5,000 not eligible for the credit).

One more thing, be sure not to mix up the child tax credit and child care credit. You can obtain the child tax credit up to $1,000 for each qualifying child under age 17, even if you don’t incur any care expenses.

When do you need to pay household employment taxes?

If you hire a child care provider in your home, please be aware that you may owe the following household employment taxes:

If you pay the babysitter over $2,000 in the calendar year or over $1,000 in any quarter of the year, you may need to file Schedule H with your tax return (Form 1040) and pay Social Security tax, Medicare tax, and federal & state unemployment tax. Fortunately, you are not required to withhold federal income tax for your care provider, but you may need to obtain an Employer Identification Number first if you have never filed Schedule H before.
Household employment taxes also involve other services at home. You can find more details on the IRS website.

All in all, hiring a caregiver can bring you some tax benefits such as Child and Dependent Care credit but may bear some tax burdens such as household employment taxes. The final tax result depends on individual circumstances, but at least you have someone to care for your kids while you work.

Let us know if you have any questions. We would be happy to help you!