To help working parents offset rising care costs, Congress created the Child and Dependent Care Credit, which lets eligible taxpayers reduce their tax bill by up to 35% of qualifying child care expense, up to $3,000 for one child or $6,000 for two or more. Whether you paid by cash or check, you must keep detailed records and report both the child and provider on your return. The credit isn’t a deduction, it’s often more valuable. To qualify, you must be working, looking for work, or attending school, and if married, you must file jointly.
Who Counts as a Qualified Child for the IRS Child Care Credit To qualify for the credit, the care must be for a qualified child. The IRS defines this as your biological, adopted, or foster child, a grandchild, or another dependent child listed on your tax return. Additionally, the IRS requires that your dependent child be 12 years of age or under when you incur child care expenses, and your eligible child must have lived with you for at least six months during the fiscal year. You must provide your child's SSN on your annual tax return to qualify for the credit.
Who You Can (and Can’t) Pay for Child Care and Still Qualify The IRS allows you to pay a child care provider in cash or by check, but you must report their name, address, and Social Security Number (or EIN) on your tax return to claim the credit. The IRS also limits who can care for your child if you want to remain eligible for the child care tax credit. You cannot pay your spouse, the other parent of the child (if you are single), or another child under 19 and still claim the credit. However, you can pay your parents, in-laws, or other family members. Care can be provided at home, outside the home, or in a facility like a daycare or kindergarten.
Child Care Tax Credit Income Limits and How Much You Can Get The child care credit begins to phase out for taxpayers with adjusted gross income (AGI) over $15,000. Taxpayers whose AGI does not exceed $15,000 can claim 35% of child care expenses, up to a limit of $3,000 for one child or $6,000 for more than one child. Once your AGI reaches $43,000, the IRS limits the credit to 20% of qualifying expense, still capped at $3,000 for one child or $6,000 for two or more children.
Can You Claim a Tax Credit for Paying a Babysitter? Taxpayers can claim up to 35% of a babysitter's expenses, with a limit of $3,000 for one child or $6,000 for two or more children. You can use both a Dependent Care Flexible Spending Account (DCFSA) and the tax credit, but not for the same expenses.
Do I Owe Taxes If I Pay My Babysitter in Cash? If you pay $2,100 or more in wages to your babysitter, then as an employer, you have to pay payroll taxes. Because you guide how the babysitter takes care of your children and provide the equipment and supplies needed to do the job, the IRS considers them a "household worker." As such, taxes must be paid. The "household worker" classification also applies to other domestic workers, such as butlers, caretakers, cooks, drivers, and housekeepers. The taxes payable include Social Security, Medicare, and federal and state income taxes. Some states, such as Alaska and Florida, do not collect personal income tax. To hire a babysitter legally, you must apply for an Employer Identification Number (EIN). The EIN will be used for identification purposes in tax returns and other related documents.
What Tax Forms Do You Need for the Child Care Credit? You can claim the credit using IRS Form 2441, and you must attach it to your Form 1040 tax return. You cannot use Form 1040-EZ to claim the credit. The IRS requires taxpayers to reduce child care expenses by any benefits received from their employer. For example, if your employer reimburses you for child care expenses, you cannot claim the credit for those reimbursed amounts.
Can I Claim the Child Care Credit and a Dependent Care FSA? You can use both the Child and Dependent Care Credit and a Dependent Care FSA, but not for the same expenses. If you use $5,000 through your FSA, you can only apply the tax credit to any additional qualifying expenses up to $1,000.
Not sure if your babysitter qualifies or how to report it correctly? A qualified tax professional can help you avoid IRS issues and maximize your savings. Use TaxProfessionals.com to find a trusted expert near you.
Written by Tax Professionals