Can You Deduct Nanny Expenses on Your Taxes?

Direct tax deductions for nanny expenses are not available. However, families may find financial relief through specific tax credits for dependent care expenses. These credits can help offset a portion of care costs that enable parents or guardians to work. Understanding these tax provisions helps maximize potential tax benefits.

Understanding Tax Benefits for Dependent Care

Nanny expenses are not a direct tax deduction that reduces your taxable income. Instead, these costs may qualify for the Child and Dependent Care Credit (CDCC), a federal tax credit. A tax credit directly reduces the amount of tax you owe, which is more advantageous than a deduction that only lowers your taxable income. The CDCC is a non-refundable credit, meaning it can reduce your tax liability to zero, but it will not result in a refund if the credit amount exceeds your tax owed.

To qualify for this credit, the care must be for a qualifying individual, to allow you and your spouse, if filing jointly, to work or actively look for work. A qualifying individual includes a dependent child under the age of 13 when the care was provided. The credit also extends to a spouse or other dependent who is physically or mentally unable to care for themselves and lives with you for more than half the year. Both you and your spouse, if filing jointly, must have earned income to be eligible, unless one spouse is a full-time student or unable to care for themselves.

Defining Qualifying Expenses and Care Providers

Qualifying expenses for the Child and Dependent Care Credit must be work-related, meaning they allow you to work or actively seek employment. These expenses can include wages paid to a nanny for care services. If the care provider includes food or activities as part of the overall fee, these can be included if they are incidental to the care.

Certain expenses do not qualify for the credit. These include costs for schooling for a child in kindergarten or above, overnight camps, or medical care expenses. The care provider must meet specific criteria. The care cannot be provided by your spouse, the parent of your child (if the child is under 13), your child who is under 19 years old, or any dependent you claim on your tax return. You must obtain and report the care provider’s Taxpayer Identification Number (TIN) or Social Security Number (SSN) on your tax forms.

How the Credit is Calculated

The amount of the Child and Dependent Care Credit is determined by your qualifying expenses and your Adjusted Gross Income (AGI). For tax year 2024, the maximum amount of expenses you can consider for one qualifying person is $3,000. If you have two or more qualifying persons, this maximum increases to $6,000. These limits apply regardless of the actual amount you spent on care.

The credit is a percentage of your qualifying expenses, ranging from 20% to 35%. Taxpayers with an AGI of $15,000 or less can claim the maximum 35% of their eligible expenses. As your AGI increases, the credit percentage gradually decreases; for instance, if your AGI is above $43,000, the credit percentage drops to 20%. For lower-income taxpayers (AGI $15,000 or less), the maximum credit is $1,050 for one qualifying person ($3,000 x 35%) and $2,100 for two or more ($6,000 x 35%). For taxpayers with an AGI of $43,000 or more, the maximum credit is $600 for one qualifying person ($3,000 x 20%) or $1,200 for two or more ($6,000 x 20%).

Steps to Claim the Child and Dependent Care Credit

To claim the Child and Dependent Care Credit, you must file Form 2441, “Child and Dependent Care Expenses,” with your federal income tax return, such as Form 1040. Form 2441 is used to calculate and report eligible expenses and determine the credit amount.

On Form 2441, you must provide specific details about each care provider, including their full name, address, and Taxpayer Identification Number (TIN) or Social Security Number (SSN). You must report the total amount you paid to each provider during the tax year. If you have received any dependent care benefits from your employer, such as through a flexible spending account, you must also report these on Form 2441, as they may reduce the expenses eligible for the credit.

Employer Tax Obligations for Nanny Services

Employing a nanny can create tax obligations for you as a household employer, distinct from claiming the Child and Dependent Care Credit. If you hire someone to work in your home and control how the work is performed, that person is considered your employee, not an independent contractor. This classification triggers responsibilities for “nanny taxes,” which include Social Security and Medicare taxes (FICA taxes) and Federal Unemployment Tax Act (FUTA) taxes.

For 2024, if you pay cash wages of $2,700 or more to any one household employee, you must withhold and pay Social Security and Medicare taxes. Both you and the employee contribute to these taxes, with each paying 6.2% for Social Security and 1.45% for Medicare, totaling 7.65% from each party. If you pay total cash wages of $1,000 or more to household employees in any calendar quarter, you are also responsible for FUTA taxes, which apply to the first $7,000 of wages paid and are paid solely by the employer. To meet these obligations, you must obtain an Employer Identification Number (EIN) from the IRS and issue Form W-2 to your employee by the end of the tax year. These household employment taxes are reported on Schedule H (Form 1040) when you file your personal income tax return.