Can You Claim Nanny Expenses on Taxes?
Unpack the tax implications of paid childcare. Learn about potential credits and your responsibilities as a household employer.
Employing a nanny provides invaluable support for families but introduces specific tax considerations. While direct tax deductions for nanny expenses are generally not available, certain tax benefits can help offset these costs. Families should understand these tax rules, including the Child and Dependent Care Credit and obligations as a household employer.
Eligibility for the Child and Dependent Care Credit
To be considered a “qualifying person,” the individual must typically be a child under the age of 13 when the care was provided. A spouse or other dependent who is physically or mentally incapable of self-care and lived with the taxpayer for more than half the year may also qualify. The care expenses must be work-related, meaning they enable the taxpayer, and their spouse if filing jointly, to work or actively look for work.
An earned income test applies, requiring both spouses, if filing jointly, to have earned income during the year. Exceptions may apply if one spouse is a full-time student or is physically or mentally unable to care for themselves. The care provider cannot be the taxpayer’s spouse, the parent of the qualifying child, or a dependent claimed on the taxpayer’s return. Additionally, the care provider cannot be the taxpayer’s child if they are under 19 years old.
For 2024, the maximum expenses for the credit are $3,000 for one qualifying person, or $6,000 for two or more, regardless of the total number of dependents. Married couples generally must file a joint tax return to claim the credit. Special rules may apply for married individuals filing separately if they lived apart for the last six months and meet other specific criteria.
To claim this credit, taxpayers must obtain the care provider’s name, address, and Taxpayer Identification Number (TIN). This TIN is typically their Social Security Number (SSN) or Employer Identification Number (EIN). This information is necessary for tax reporting and should be collected from the care provider.
Understanding Household Employee Tax Obligations
Hiring a nanny often means becoming a household employer, which carries specific federal tax responsibilities, sometimes referred to as the “nanny tax.” These obligations arise when wages paid to a household employee meet certain thresholds. For the 2024 tax year, if cash wages of $2,700 or more are paid to any one household employee, federal Social Security and Medicare taxes, known as FICA taxes, become due.
FICA taxes are a shared responsibility, with both the employer and the employee contributing. For 2024, the combined rate is 15.3% of the employee’s cash wages, comprising 6.2% for Social Security and 1.45% for Medicare from both the employer and employee portions. The employer is responsible for collecting the employee’s share through withholding and remitting both the employer and employee portions to the IRS. There is a Social Security wage base limit, which for 2024 is $168,600; wages above this amount are not subject to Social Security tax, though Medicare tax continues to apply to all wages.
Beyond FICA taxes, employers may also be subject to the Federal Unemployment Tax Act (FUTA) tax. This tax applies if total cash wages of $1,000 or more are paid to all household employees in any calendar quarter during the current or preceding year. FUTA tax is solely employer-paid and is calculated on the first $7,000 of cash wages paid to each household employee. The FUTA tax rate is 6%, but employers can claim a credit for amounts paid into state unemployment funds, reducing the net federal rate.
To comply with federal employment tax obligations, household employers must obtain an Employer Identification Number (EIN) from the IRS. Employers must also track all wages paid and taxes withheld. Certain individuals are exempt from these tax rules, including a spouse, a child under 21, a parent, or an employee under 18. State unemployment taxes and other state-specific obligations may also apply, varying by state.
Reporting Care Expenses and Claiming the Credit
To report care expenses and claim the Child and Dependent Care Credit, taxpayers must complete Form 2441, Child and Dependent Care Expenses. This form is attached to their federal income tax return, typically Form 1040. On Form 2441, taxpayers must provide essential information about each care provider, including their name, address, and Taxpayer Identification Number (TIN).
The credit amount is determined by applying a specific percentage to the qualifying care expenses, up to the maximum limits ($3,000 for one person, $6,000 for two or more). The percentage used in the calculation varies based on the taxpayer’s Adjusted Gross Income (AGI). For instance, for the 2024 tax year, the credit can range from 20% to 35% of eligible expenses. Taxpayers with an AGI of $15,000 or less can claim the maximum 35% of expenses, while those with an AGI of $43,000 or more are limited to 20%.
If a taxpayer is a household employer, they must also file Schedule H, Household Employment Taxes, with Form 1040. Schedule H reports the federal Social Security, Medicare, and FUTA taxes owed as a household employer. The taxes calculated on Schedule H are then incorporated into the taxpayer’s overall tax liability on Form 1040.
Thorough record-keeping is important for both claiming the credit and fulfilling employer obligations. Taxpayers should retain detailed records of all care expenses, including receipts, payment records, and the care provider’s contact and identification information. These records help accurately complete tax forms and substantiate claims during an IRS inquiry or audit.