Dependent care benefits are a series of benefits that employers may choose to offer employees to help them with the costs of caring for family members or those who rely on them for care. These benefits can be used to reduce the cost of daycare, after-school care, elder care, and more—as long as the costs are work-related.
Dependent care benefits are reported on an employee’s W-2 form (box 10).
What Can Dependent Care Benefits Be Used For?
Dependent care benefits can be used by employees to care for any dependent children under 13 years old, a spouse, parents, or physically or mentally disabled adults who live with the employee. Expenses must be work-related—that is, they must be incurred because the employee is at work, missing work, or looking for work, and therefore cannot provide needed care themselves.
Here are some examples of expenses that dependent care benefits can be used for.
- A babysitter, nanny, or au pair (if both parents are at work)
- Care for a sick child
- After-school programs
- Summertime day camps
- In-home help for a disabled or elderly dependent
- Transportation costs for a disabled adult (for example, to a doctor’s appointment)
Note that education costs (such as school tuition), housekeeping costs, and sports and music lessons do not qualify as dependent care expenses.
Types of Dependent Care Benefits
There are several types of dependent care benefits available to employees.
Flexible spending accounts
A dependent care flexible spending account (FSA) is a cash account that employees can use to be reimbursed for eligible dependent care expenses. The account must be set up by employers and is typically administered along with other employee benefits.
Employees and employers can cumulatively contribute up to $5,000 (for married employees) or $2,500 (for unmarried employees) to an FSA each year. There are no requirements for employers to make contributions, but many employers choose to match employee contributions.
When an employee incurs dependent care expenses, they pay for them out of pocket and then request reimbursement from their FSA. The money spent is treated as pre-tax income, meaning that it does not count towards an employee’s net income when they file taxes.
Importantly, the money within dependent care FSAs must be used within a certain amount of time. If it is not used, the money is given to the employer and cannot be returned to the employee as cash. In addition, once an employee elects the amount to contribute to an FSA each pay period, they cannot change that amount until the next open enrollment period or until a qualifying life event (such as a marriage, birth, or death).
Child and dependent care credits
The child and dependent care credit is a tax credit that employees can take if your company does not offer a dependent care FSA. The amount of the credit is equal to the employee’s total dependent care expenses for the year, up to $3,000 for a single dependent or $6,000 for two or more dependents.
This is a tax credit, not a deduction. That means that expenses claimed using the child and dependent care credit reduce an employee’s federal tax bill, as opposed to simply reducing their taxable income.
Paid family leave
A growing number of companies are now offering paid family leave. There are no federal regulations around what types of events qualify an employee to take paid family leave, so it’s up to employers to set their own guidelines. Paid family leave may be offered at full pay, half pay, or any rate that employers decide.
Keep in mind that the majority of employees are eligible for up to 12 weeks of unpaid leave under the Family and Medical Leave Act.
Why Should Your Company Offer Dependent Care Benefits?
Companies are not required to offer dependent care benefits, but it makes sense for many companies to do so. Offering dependent care benefits can help your company attract and retain talented employees. Facilitating dependent care also makes it easier for employees to continue working rather than taking unpaid leave under the Family and Medical Leave Act.
For most employers, the administrative costs of offering dependent care benefits are relatively small. This is especially true if your company already administers other benefits such as a health insurance plan or paid sick leave.
In the long run, offering dependent care benefits can improve morale and employee loyalty. Employees will see that your company supports them with dependent care expenses, which is something about which not every company is proactive.
Dependent care benefits can be used by employees to help cover the costs of caring for a child or dependent adult while they’re at work. These benefits can be delivered through a dependent care FSA, a tax credit, or paid family leave. For many companies, offering dependent care benefits is a good way to attract and retain talented employees.