4 nanny tax mistakes to avoid this tax season

Accounting

A household employer can use a Dependent Care Flexible Spending Account offered through their job to set aside pre-tax money (up to $10,500 in 2021 under the American Rescue Plan) to help pay for childcare and reduce their taxable income. This can save a family up anywhere from $3,300 to $4,700 depending on their marginal tax rate, where they live and other factors.

Wages paid to a nanny is considered a reimbursable expense under a Dependent Care FSA.

A nanny’s pay is a qualifying expense for the Child and Dependent Care Tax Credit, which also got a big boost from the latest pandemic relief legislation. The credit has increased to $8,000 for families with one child and to $16,000 for two or more children. The amount of the credit gradually decreases based on a family’s adjusted gross income from 50 percent of qualifying expenses for households with an AGI of less than $125,000 to one percent for households with an AGI of $440,000.

With the American Rescue Plan, a family with an AGI between $185,000 and $400,000 can get a 20 percent credit on qualified expenses and receive $1,600 for one child and $3,200 for two or more children.

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