How to Pay for Daycare Pretax Through Employer Benefits
Learn how to use employer benefits like dependent care FSAs and childcare programs to pay for daycare with pretax dollars and reduce your taxable income.
Childcare costs can be a major burden for working parents, but employer benefits can help reduce expenses. Certain workplace programs allow the use of pretax dollars for daycare, lowering taxable income and increasing savings. Understanding how these programs work and which expenses qualify is key to maximizing their benefits.
Dependent Care Flexible Spending Accounts
A Dependent Care Flexible Spending Account (DCFSA) lets employees set aside pretax earnings for eligible childcare expenses, reducing taxable income and providing savings on federal, state, and payroll taxes. For 2024, the IRS permits contributions of up to $5,000 per household ($2,500 if married and filing separately).
DCFSA funds can be used for daycare centers, in-home babysitters, and after-school programs, provided the care is necessary for parents to work or attend school full-time. Unlike a Health Savings Account (HSA), a DCFSA follows a “use-it-or-lose-it” rule, meaning unused funds at the end of the plan year are forfeited. Some employers offer a grace period of up to 2.5 months or a limited carryover, but policies vary.
Employees must enroll during their employer’s open enrollment period or after a qualifying life event, such as the birth of a child. Contributions are deducted in equal installments throughout the year, and reimbursements require submitting proof of eligible expenses. Since DCFSA funds are not subject to federal income tax, they can provide significant savings, particularly for those in higher tax brackets.
Employer-Sponsored Childcare Programs
Some companies offer direct childcare benefits, such as on-site daycare, subsidies for external providers, or backup care services. These programs help employees manage childcare while maintaining work schedules.
On-site daycare facilities provide convenient access to childcare at or near the workplace, reducing commute times. Employers may operate these facilities themselves or partner with third-party providers. Availability is often limited, and early registration may be required.
For employees without access to on-site care, some companies provide childcare subsidies or tuition discounts at partnered daycare centers. These subsidies may be structured as direct payments to providers or reimbursements to employees. The amount of financial assistance varies, with some companies covering a percentage of costs while others offer a fixed stipend. Employers may set eligibility requirements, such as income limits or minimum work hours.
Backup childcare services help when a regular caregiver is unavailable due to illness or scheduling conflicts. These programs provide temporary care at a reduced cost, preventing unexpected work absences. Some employers contract with national childcare networks to ensure coverage in multiple locations.
Eligible Daycare-Related Expenses
To qualify for pretax benefits, childcare expenses must meet IRS guidelines. The primary requirement is that the care enables the parent or legal guardian to work or actively seek employment. Recreational programs or babysitting services that are not work-related do not qualify.
Before- and after-school care is eligible if it is custodial rather than educational. For example, an after-school program that supervises children while parents finish their workday qualifies, but private tutoring or enrichment classes do not.
Summer day camps are covered if they provide general supervision rather than specialized instruction. A traditional day camp qualifies, but a camp focused on a specific skill, such as coding or tennis, does not. Overnight camps are explicitly excluded.
Care provided by a nanny or au pair is eligible as long as the provider is not a spouse, the child’s parent, or another dependent. The caregiver must report their earnings as taxable income, meaning payments made under the table do not qualify.
In-home daycare services are covered if the provider complies with state regulations. Some states require in-home daycare providers to be licensed, while others allow informal arrangements. Household employees providing childcare, such as a full-time nanny, must be paid in accordance with IRS household employment tax rules, including Social Security and Medicare taxes if annual wages exceed $2,700 in 2024.
Submitting Reimbursement Claims
Proper documentation is required for reimbursement through employer-sponsored benefits. Most plans require an itemized receipt that includes the provider’s name, address, taxpayer identification number (TIN) or Social Security number, dates of service, and amount paid. Claims without these details may be denied.
Expenses must generally be incurred before claims can be submitted. Some employers offer direct payment options, while others require employees to pay out-of-pocket first and request reimbursement later. Processing times vary but typically range from a few days to several weeks.
If an expense is deemed ineligible, employees may need to provide further justification or a corrected receipt. Some employers allow appeals, but this often involves additional paperwork. Keeping digital copies of receipts and provider agreements can help prevent issues with missing documentation.