Parent’s Guide to Taxes: Understanding Childcare Tax Credits and the Nanny Tax

Few would dispute that tax talk is confusing, ever changing and often intimidating. Provided below are guidelines and tips to better understand tax laws and help you determine if and how child and dependent care tax credits and nanny taxes may affect you.

via 401(K) 2013
via 401(K) 2013

Child and Dependent Care Tax Credits

You  may be able to offset your childcare costs by taking advantage of a childcare tax credit. Essentially, the credit is a percentage of the amount you’ve paid this past year in childcare for children under 13. To qualify, you had to have been paying a nanny or babysitter to care for your children while you work or look for work, meaning you cannot take advantage of the credit if you are hiring a sitter so you can run personal errands, hit the gym or simply enjoy some well-deserved time to yourself.

Key points to know:

  • You can count up to $3,000 in expenses for one qualifying child or up to $6,000 in expenses for two or more qualifying dependents.

  • The amount of the tax credit is based on your adjusted gross income and can range from 20%-35% of your expenses.

  • To be eligible for the childcare tax breaks, you must identify the care provider on your tax return, report the wages paid to him or her, and remit the necessary employment taxes.

For more details, check out this helpful and easy to follow 10 Things to Know about the Child and Dependent Care Credit from the Internal Revenue Service.

Nanny Taxes

How do you know if the Nanny Tax applies to you and your regular nanny or sitter? The IRS requires you to pay employment tax if you are paying a domestic household employee – including a nanny or babysitter – more than $1,800 per year.  There are several qualifiers and exceptions, so check the IRS guidelines to determine if you are required to pay the taxes. There are generally both federal and state tax obligations. States requirements differ, so check to find specifics for your home state. Need some help? Services like HomeWork Solutions specialize in helping parents and childcare workers navigate the tax waters.

We aren’t here to advise you on your potential obligations or personal filings, but hope to help by providing helpful guidelines and resources for finding more information. Your professional tax advisor or accountant can certainly tell you more. Also be sure to check the IRS guide for household employers.