A lot of our clients juggle work and caretaking and sometimes that juggling needs some extra hands. Can you say, nanny?!

A question we get asked on the regular is: If I hire a babysitter so that I can work, does that make it a business deduction?

Short answer: No

Long answer: Still no, but in more words.

You see, babysitters and nannies are considered household employees, not business expenses. This means that they should be paid through your personal bank account, not your business bank account.

I know, bummer. We love our business write-offs! But if you think about it, it makes sense. If you were a W2 employee and had to go to work every day, do you really think your boss would pay for your childcare on top of your salary? No. Absolutely not. They don’t care what your personal life looks like, if you need childcare care, a pet sitter, a laundry service, a home chef, a cleaner, etc. They just want you to show up, do the job, and they will pay you a set salary for the work performed.

The same concept applies to your business. Your business cannot pay for your nanny, cleaner, chef, or any other personal expenses. But it can pay you a nice pretty salary so that you have enough funds to pay for the extra help!

And even though caretakers are not considered a business deduction, the good news is, there is a tax credit that may be able to offset some of the costs associated with hiring them. Let’s take a closer look at what this credit is, how it works, and how much you get.

What is the Child and Dependent Care Credit?

The Child and Dependent Care Credit allows you to offset (or reduce) the amount of taxes you owe by claiming a credit for a portion of your childcare expenses. The tax credit reduces the amount of federal income tax due. If you do not owe taxes, this credit will increase your refund.

Who qualifies for it?

If you pay for child care so that you can work, attend school, or look for employment, you may be eligible for the tax credit.

What expenses qualify?

What Qualifies	What Does NOT Qualify
The qualifying child must be under the age of 13 or a disabled dependent of any age	Payments to your older children to watch your younger children
Day care expenses	Payments to your spouse to watch your child
Before- and after-school care programs	Payments to the dependent’s parent
Day camp	Overnight camps
Transportation to and from care providers	Babysitters paid cash “under the table” *
Babysitters, nannies, housekeepers (W2 required)	Educational/tuition expenses

You’ll have better luck claiming childcare credits for payments made to childcare providers operating in an official capacity, such as nursery schools and daycare centers, as opposed to the $40 you paid a teenager to watch your child for an afternoon. Parents who pay their babysitters cash “under the table” cannot claim the childcare tax credit.

How much is the tax credit?

• Up to 35% of qualifying expenses which is up to $3,000 for one qualifying child and $6,000 for two or more qualifying children
• The credit phases out to 20% when your adjusted gross income exceeds $43,000
• If you are married, the tax credit is limited to the earned income of the lower-earning spouse.  If one spouse earns income, but the other spouse does not, you are not eligible for the tax credit.
• For 2024, the credit for child and dependent care expenses is nonrefundable, so it can lower your tax bill down to 0, but you won’t receive a refund on anything extra. 

Let’s look at some examples

If your adjusted gross income is less than $43,000 and you have one child for whom you paid $8,000 for daycare, you would qualify for a non-refundable credit of $3,000. This means that if you owed $5,000 in taxes, the child and dependent care credit could reduce your bill to $2,000. If you only owed $1,000 in taxes, the credit would reduce your bill to $0. Buuuut you wouldn’t receive a refund for that additional $2,000 of credit. 

If you earned that same amount of income, but your spouse didn’t earn any income  (and they aren’t disabled) you would not receive the child and dependent care credit. Recall that if you are married, both spouses must have income to qualify for this credit.

If you paid a babysitter $1,500 in cash to care for your children while you work, you can claim the child and dependent care credit. Keep in mind though that the sitter may not have reported that income on their tax return. If you report that $1,500 on your tax return, but the sitter doesn’t report it on their return, the IRS could choose to audit either or both of you. It’s best to pay childcare providers by methods other than cash, like through payment apps (Venmo, Paypal) or by check. Paper trails are always a good idea. If you have to pay your provider in cash, make sure that they report that income on their tax return.

Now what?

Even though the IRS does not consider childcare to be a business expense, that doesn’t mean you have to eat 100% of the costs yourself. The Child and Dependent Care Credit offers a benefit to working parents. Keep track of those childcare expenses so you can take advantage of this savings opportunity on your next tax return. 

Not sure if you qualify or want help filing your taxes? Let’s chat! We’d love to work with you.