Au Pair/Nanny Tax Issues... (expenses, credit, company, money)

[evilnewbie]

I have been thinking about getting a nanny/au pair and have been reading some materials about it...

some places state that

"We recommend that families with more than one dependent also fill up the FSA with $5,000 in order to get up to $2,300 in tax credit. If your childcare expenses exceed the FSA contribution, you can apply the Tax Credit toward “excess expenses” and gain an extra $200 in tax credit annually. "

What Tax Credit is this that is underlined and bolded? Its not the Child care credit which is $600 per child... also how do you apply "excess expenses" and get an extra $200? It seems too vague and I am wondering if it is intentional... anyone know? I know that you cannot use both a FSA and also claim the child and dependent credit either, is that correct. Is there anything else I am missing?

[elikhom]

Yes, they are talking about the child care tax credit.

Remember if you have more than one child you can get from 1200 to 2100 depending on your income and then claim an additional $200 as "excess expenses". That's why they say up to $2300. But you'll have to be poor and with two or more children to be able to get the full $2300.

[evilnewbie]

Actually, I surfed several more pages and found this...

"The Flexible Spending Account. With this option, you may completely offset your nanny tax costs! For example, paying your nanny $500 a week will lead to nanny taxes of about $1,900 annually. By putting $5,000 into your Flexible Spending Account, you reduce your annual taxes by about $2,000. The result? It may not cost any additional money to pay nanny taxes. Check the availability of this benefit with your company or benefits staff."

So basically with the FSA, you don't pay taxes on it AND you use it to pay your nanny and it will reduce your "employer" part of the taxes when the nanny works... so basically, you pay them a flat salary without the entanglements of employer taxes... Also you pay less in Federal and State taxes and no FICA or SS taxes either... also it seems you CANNOT use a FSA and the child care credit at the same time (for most people but I don't know why)... its either/or but not both (for most people)... Also it seems the BEST one to use is the FSA and not the Child Care Credit...

[evilnewbie]

Isn't Obama trying to change something with the Dependent and Child Care Credits?