Taxes and Child Care

Here are some of the tax implications of hiring a nanny or sending your child to day care:

1) Day Care: You can claim the child-care tax credit if you pay for care for children younger than 13 while you work. You can count up to $3,000 in qualifying child-care expenses for one child, or up to $6,000 for two or more children.

If your employer offers a dependent-care flexible spending account, that may be a better deal. You can set aside up to $5,000 a year to cover child-care costs for children younger than 13. The money you contribute to an FSA escapes income taxes, Social Security and Medicare taxes. You might be able to take advantage of both tax breaks.

2) Hiring a Nanny: You must withhold and pay Social Security and Medicare taxes if you pay a household employee $1,800 or more a year. To pay these nanny taxes there’s lots of paperwork involved.