Dependent Care Plans: Will You Get a Bonus This Year?

6a0133f3fc5805970b01bb079bee5b970d-320wiBetween November and March is the time of the year to find out the answer to this question.

Some parents in your family child care program will be able to give you more money without it costing them anything.

How is this possible?

Many employers offer a payroll option that allows their employees to set aside some of their wages to pay for child care expenses, without the money being taxed.

These plans are called dependent care plans, flexible spending account, cafeteria plans, salary reductions plans, or pre-tax spending accounts.

Parents who participate in these plans can save hundreds of dollars in taxes by setting aside a maximum of $5,000 per year, per family. Parents decide how much money to set aside before the year begins and their employer keeps any unspent money.

You want to make sure that you, not the employer, receive any unspent money.

Here’s how. Calculate how much parents will pay your program by the end of this year. If the amount is more than $5,000, there is no unspent money and there is nothing further you can do.

If the amount is less than $5,000, then say this to the parent:

“I know that you participate in a dependent care plan at work. My records indicate that you will pay me approximately $X by the end of the year. If you set aside more money in your plan than this amount, this unspent money will be kept by your employer. However, if you give me this unspent money I will use it to increase the quality of care available to your child.”

For example, if the parent will pay you $4,800 this year and she set aside $5,000, you want the parent to give you the extra $200.

Some parents may want you to apply the unspent money to care you deliver the next year. This is illegal, so do not agree to this. Money set aside under these plans can only be spent on child care services delivered this year.

If the parent agrees to give you the money, just add the extra amount to the next parent payment. If there is $200 in unspent money, and you regularly charge $180 a week, ask the parent to pay you $380 for care next week.

If you want, you can submit a bill to a parent in January or February next year for the unspent money from this year, as long as you indicate on the bill that the payment is for child care services this year.

(Parents have until next March 31st to submit a receipt to their employer for child care services delivered this year.)

There is nothing wrong with adding an extra amount onto your normal child care bill, or giving the parent another receipt for the same week in December.

The parent should submit a receipt to their employer for this money exactly the same way they submit all other payment receipts. Because this money is being spent on child care services it should not be identified as a “bonus” or “charitable contribution.” There is nothing wrong with the parent deciding to pay you an extra amount for the care you provide.

Since the parents will lose this money unless they give it to you, most parents will agree to this arrangement. You must report any extra money you receive as income, and you can deduct any items you purchase for your business with this money. I have heard from many providers who have received extra money from parents, ranging from $50 to $1,500.

Don’t be shy about asking parents for any unspent money! Tell them you will use the money to improve the quality of your program.

Under what situations would a parent not spend all the money set aside in their plan? Parents who changed caregivers in the middle of the year, parents who missed a lot of work because of illness, parents who overestimated their child care expenses, etc.

Note: A change in the law a few years ago allows employers to extend the time employees may use their money set aside in these plans for child care services through March 15th of the following year. In other words, if a parent has $200 in unspent money as of December 31st, they might be able to use it for child care delivered January 1st – March 15th.

It’s up to the employer to adopt this rule in their dependent care plan. If this is the case, it’s much more unlikely that employees will have unspent money to give you.

What have you got to lose by asking parents if they have used up all the money in their dependent care plans?

I’ve recorded this article as a podcast. Here’s a link to all my podcasts.

Tom Copeland – www.tomcopelandblog.com

Image credit: article.wn.com

Record Keeping smallFor more information about dependent care plans, see my book Family Child Record Keeping Guide.



Categories: Parents & Taxes, Record Keeping & Taxes

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2 replies

  1. I have a family who enrolled their child as a married couple last year. Now they are divorcing, and they pay on alternate weeks (one week dad pays, next week mom pays). Q1:Should I write separate receipts to each of them and total their payments separately? I know at least one of them has a flex spending account. Q2:What are the limits of flex spending accounts or the child care credit? Q3:For normal child care contracts and other paperwork, should I have both parents sign like I did when they began?
    Thanks.

  2. Yes, give them each a separate receipt. The maximum that can be set aside in a flex spending account is $5,000. The limit for the child care tax credit is $3,000 for one child. Yes, get both parents to sign the contract.