Day Care and taxes question?

Question

We are going to hire some day care to come to our house and watch our baby. Is the money we pay them tax deductible? I know if we took him to say- Kindercare- that money is tax deductible- but what about hiring out of our home? How do I show proof of payment for tax purposes?

Any help would be appreciated.

Thank You

Answer 1

If you have someone babysit in your home, you are legally required to treat them as a houshold employee.  That means you would withhold taxes from their paychecks, and pay employer taxes like matching their social security and medicare deductions, and unemployment comp and workers comp.  This law is often ignored, but it can come back to bite you since the person can later file with the IRS challenging their status.

That said, yes the money you pay for in-home day care is treated for tax purposes the same as a center like Kindercare - if the care is so you can work, then all or part of it is eligible expenses for the child care tax credit.  Proof of payment would be the cancelled checks for the care provider.

Answer 2

See Form 2441.

There is a credit available for child and dependent care expenses.

One caveat.  If you hire someone to come in to your home, chances are you have a "household employee".  You are his or her employer the same as any other employer.  You would have to apply for a federal ID number, withhold taxes and pay the employer's share of social security and medicare as well as pay unemployment taxes.  Go to IRS.gov and search for "Household Employee" for more info.

Answer 3

If you are hiring a person (meaning that you a paying the human yourselves), then you must pay household employment taxes, which may exceed the benefit of the tax deduction.

If you are using an agency that employs the person and that withholds social security and medicare taxes from the person's pay, then you do not have to pay household employment taxes.

In either case, pay by check or credit card (not cash), have whomever you pay give you a receipt for every payment, and save your canceled checks and your credit card bills.

Answer 4

It is so long as the person you are paying it to is reporting it as income.  The government has to get their cut from someone :-)  The person you are working with should provide you with an invoice to keep every thing on the up-and-up.

Have you considered using a Section 125 plan as well?  This allows you to use pre-tax money to pay for child care services.  Check with your HR or benefits department for the details.