April tends to be when tax talk reaches its crescendo. People are filing their personal income tax returns and crossing their fingers for a big refund check from Uncle Sam. But if you’re a family in the Big Apple with in-home childcare expenses, you know your tax season really began back in January and is finally winding down.
By now, you’ve accounted for all of your caregiver’s wages and taxes for 2013, given her a W-2 Form, and filed paperwork with the Social Security Administration. It’s quite a bit of work to do, so kudos for getting the job done!
There are only two things left to do before the April 15 personal income tax filing deadline. First, make sure you attach a Schedule H to your personal income tax return. Then, be sure to capitalize on your childcare tax breaks.
The Schedule H simply summarizes your household employment activity, so the Internal Revenue Service understands you paid someone to work in your home, withheld federal taxes from her, and paid your share of federal taxes. If you’ve remitted the federal tax throughout the year using the 1040-ES (Estimated Tax) process, you’ll reflect those payments on your 1040 Form and they will offset the liability reported on Schedule H. If you have not made those payments yet, they’ll be factored into your tax payment and refund.
The tax break you’ll want to take is the Child and Dependent Care Tax Credit (IRS Form 2441) — not to be confused with the Child Tax Credit. As long as childcare was needed because you and your spouse both work or are full-time students, you can apply the wages you paid your caregiver (and other qualifying childcare expenses) to this tax credit.
If you have one child, you can itemize up to $3,000 of expenses per year and if you have two or more children, you can itemize up to $6,000 per year. Most families will receive a 20 percent tax credit on these expenses, so you can expect to see a savings of up to $600 if you have one child and up to $1,200 if you have two or more children.
NOTE: If you applied your childcare expenses to a Dependent Care Account (“Flexible Spending Account” or “FSA”) through your work, you likely cannot take the Child and Dependent Care Tax Credit unless you have two or more children. The dollars applied in a Flexible Spending Account count against your expense limits. So, if you have one child and applied more than $3,000 to your account, you have already exhausted your expense limit. However, if you have two or more children, you may itemize the expenses that have not already been applied to your account — up to $6,000. Since most people utilize $5,000 in their Flexible Spending Account, this provides an additional $1,000 that can be itemized on Form 2441.
As you finalize these taxes and tax breaks, it’s a great opportunity to look back at your care-related expenses in 2013 and see if you need to adjust your budget for 2014. For instance, a few things you definitely need to keep in mind are changes to laws specific to New York residents. As of this year, the minimum wage increased from $7.25 per hour to $8 per hour, so you need to make sure you’ve budgeted for this increase if you paid under $8 per hour in 2013.
Lastly, if you’re not doing so already, you’ll need to make sure you’ve budgeted for your caregiver to have paid days off. State law mandates that if — on average — she works 30 hours or more per week, she is entitled to three paid days off once she’s worked for you for a full year. If she works between 20 and 30 hours per week, she is entitled to two paid days off and if she works less than 20 hours per week, she earns one paid day off. This paid time off mandate was part of the New York Domestic Workers’ Bill of Rights legislation that passed in 2010.
We know all these details are tedious, but taking care of all these tax and labor law obligations is important to you and your caregiver. It protects you from audit and wage disputes and entitles you to tax breaks. For your caregiver, the payroll system funds all the benefits and protections (Social Security, Medicare, Unemployment, etc.) other workers enjoy — now and in retirement. That peace of mind for both parties makes for a more professional and more successful working relationship.
Stephanie Breedlove is the vice president of Care.com HomePay.
