Is an Au Pair Tax Deductible? What You Need to Know

Hiring an au pair can be a valuable childcare solution, but it comes with financial and tax implications. Many parents wonder whether employing an au pair is tax-deductible or if they qualify for tax benefits.

Tax treatment depends on factors like how the au pair is classified and what credits or deductions apply. Understanding these details helps families maximize savings while ensuring compliance with IRS regulations.

Household Employee Classification

Determining whether an au pair qualifies as a household employee is key to understanding tax obligations. The IRS generally classifies a worker as a household employee if the family controls what work is done and how it is performed. Since au pairs live with host families and provide childcare under their direction, they typically meet this classification.

Unlike independent contractors, who provide services to multiple clients, household employees work under an employer’s direct supervision. This distinction affects tax responsibilities, including Social Security and Medicare taxes, which apply to household employees earning $2,700 or more in 2024. However, au pairs, as part of a cultural exchange program under the J-1 visa, are exempt from these taxes.

The Fair Labor Standards Act (FLSA) applies to household employees, meaning au pairs must be paid at least the federal minimum wage. The U.S. Department of State sets a specific weekly stipend amount that host families must follow. While state laws may impose additional wage and labor requirements, federal guidelines govern au pair compensation.

Child and Dependent Care Credit

Families hiring an au pair for childcare may qualify for the Child and Dependent Care Credit, which offsets childcare costs for working parents. To be eligible, the care must be for a child under 13, and expenses must be necessary for the taxpayer to earn income.

The credit covers a percentage of eligible childcare expenses, with a maximum of $3,000 for one child or $6,000 for two or more. The percentage ranges from 20% to 35%, depending on adjusted gross income (AGI). For instance, a family with a $50,000 AGI would typically receive a 20% credit, meaning they could claim up to $1,200 if they have two children and at least $6,000 in qualifying expenses.

To claim the credit, payments to the au pair must be reported accurately. The caregiver cannot be a dependent or spouse of the taxpayer. The IRS requires the provider’s name, address, and taxpayer identification number (TIN) on Form 2441, which is filed with the tax return. If the au pair lacks a Social Security number, they may need an Individual Taxpayer Identification Number (ITIN) to meet reporting requirements.

Payment and Withholding Requirements

Compensating an au pair involves more than just providing a stipend. While au pairs are exempt from Social Security and Medicare taxes, their stipends are taxable wages. They must report earnings and may owe federal income tax. Families are not required to withhold this tax but may do so if the au pair requests it.

State tax rules vary. Some states require withholding even if federal law does not. Certain jurisdictions mandate state income tax withholding for household employees, which could apply depending on residency status and earnings. Families should check state-specific regulations to determine if withholding or estimated tax payments are necessary.

Federal unemployment tax (FUTA) does not apply to au pairs, but state unemployment insurance (SUI) laws differ. Some states require contributions regardless of federal exemptions, so families should verify whether they need to register as an employer with their state’s labor department.

Documentation for Expense Tracking

Maintaining thorough records of au pair-related expenses is essential for tax reporting and credit eligibility. The IRS requires clear documentation of childcare costs, so families should keep payment logs, bank statements, and written agreements outlining compensation terms. Without proper records, deductions or credits could be denied in an audit.

Using accounting software or a dedicated spreadsheet helps track payments, reimbursements, and additional costs like room and board or educational expenses. Electronic payments should be backed by transaction receipts or bank confirmations. For check payments, keeping copies of cashed checks provides verification.

Families should also retain correspondence with au pair agencies regarding program fees. While agency fees are generally not deductible, distinguishing between agency costs and direct au pair compensation helps avoid accounting discrepancies. Documenting the au pair’s work schedule can further substantiate childcare services if questioned.

Reporting on Tax Returns

Once all au pair-related payments and expenses are documented, families must report them correctly on their tax returns. To claim the Child and Dependent Care Credit, they must complete Form 2441 and attach it to Form 1040. This form requires the au pair’s name, address, and taxpayer identification number (TIN or ITIN), along with the total amount paid for childcare. Errors or missing information could delay processing or disqualify the credit.

If a family voluntarily withholds federal income tax from the au pair’s stipend, they must issue a Form W-2 at year-end and file it with the Social Security Administration. While Social Security and Medicare taxes do not apply, reporting wages correctly ensures the au pair meets their tax obligations.

State household employment tax requirements may require additional reporting. Some states mandate quarterly filings or annual reconciliation forms, even if federal law does not require withholding. If state unemployment insurance applies, employers may need to submit wage reports and contributions. Given the complexity of tax compliance, consulting a tax professional can help ensure families meet all requirements and maximize tax benefits.