Posted by Daniel P Vigilante CPA and Profit Consultants

Can I deduct childcare expenses if I pay the babysitter in cash?

Can I deduct childcare expenses if I pay the babysitter in cash?

To help working parents cope with the rising costs of care, Congress approved the credit to care for children and dependents. The loan allows working parents to reduce their tax obligations by 35% of eligible child care expenses, limited to $ 3,000 for one employee or $ 6,000 for more than one. It doesn't matter whether you paid for the daycare in cash or by check, as long as you justify your expenses and identify your child and their provider on the tax return.

As a loan, taxable care expenses are not deductible, and taxpayers who have eligible care expenses receive greater tax credit benefits than they would receive from a deduction. The IRS requires you to search for available jobs, work effectively, or attend school to qualify for childcare. If you are married, you must declare your taxes together to be entitled to the tax credit. Married taxpayers who file their taxes individually cannot claim the credit.

If you intend to deduct cash payments for a babysitter, you must keep accurate records of all transactions to make sure the IRS accepts the deductions.


Definition of a qualified child

You must pay the care costs to receive care of a qualified child. According to the IRS, a qualified child is your biological child, a foster child or adopted child, a grandchild, or any other dependent child that you report as such 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 present your child's SSN on your annual tax return to qualify for the credit.


Limitation considerations

The IRS permits taxpayers to pay their child care providers in cash or by check. However, you must provide the employer identification number or the child care provider's social security number on your tax return. The IRS also limits who can care for your child, qualifying you to remain eligible for a child care tax credit. You cannot pay your spouse, the other parent of the child, if you are single, or another child under 19, as long as you are still entitled to the tax credit. However, you can pay for your parents, in-laws, or other family members, and care can be provided at home, outside the home, or in kindergarten.


Phase-out rules and Credit values

The child care loan is being phased out for taxpayers with adjusted gross income over $ 15,000. Taxpayers whose adjusted gross annual income does not exceed $ 15,000 can claim 35% of child care expenses, up to a limit of $ 3,000 per child, or $ 6,000 for more than one child. At $ 43,000, the IRS limits the loan to 20% of expenses incurred or $ 3,000 per child or $ 6,000 for two or more children.


Can you get a tax credit for babysitter expenses?

The taxpayer can get a deduction of 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. The taxpayer can claim a DCFSA and a tax credit, but not for the same expenses.


How much can I pay a babysitter without paying taxes?

If you pay $ 2,100.00 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 you provide the equipment and supplies she needs to do her job, the IRS considers her a "household worker." As such, taxes must be paid.

Household workers' classification also applies to other domestic workers, such as butlers, caretakers, cooks, drivers, homemakers, etc. 

The taxes payable are 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, you must apply for an Employer Identification Number (EIN). The Employer Identification Number will be used for identification purposes in tax returns and other related documents.


Tax forms

You can claim a credit using IRS Form 2441, and you must attach it to your Form 1040 tax return. You cannot use Form 1040-EZ to claim a credit. The IRS requires taxpayers to reduce child care expenses for all benefits received from their employers. For example, if your employer reimburses your employees for child care expenses, you will not be able to receive credit for the reimbursed amount.


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