What are Dependent Care Benefits

Dependent care benefits are provided by an employer to an employee for use in caring for dependents, such as young children or disabled family members. Dependent care benefits may include flexible spending accounts, paid leave, and tax credits and can be worth thousands of dollars to eligible participants.

Key Takeaways

  • Dependent care benefits include IRS tax credits and benefits offered by an employer to its employees for the care of their dependents.
  • The IRS provides a child and dependent care tax credit to eligible taxpayers who paid child or dependent care expenses for the tax year.
  • Eligible employees can allocate a portion of their pay to be put into a special flexible spending account to later be reimbursed for qualifying out-of-pocket dependent care expenses.
  • Paid leave is another benefit available to certain employees who take time away from work to care for a dependent.

How Dependent Care Benefits Work

Dependents, according to the Internal Revenue Service (IRS), are treated as an exemption credit that may be claimed on an annual tax return. On its own, the dependent credit can reduce a filer's taxable income by thousands of dollars. Children are the most commonly claimed dependent, though dependent care benefits may be extended to a variety of people given that they meet several stipulations. For example, dependents may also be relatives, roommates, or even romantic partners. The IRS provides a guide on who may be claimed as a dependent.

Dependent care benefits are available to individuals whose children are cared for by a daycare facility or provider. Such benefits may take the form of childcare tax credits or a dependent care flexible spending account (FSA). Each provides tax savings based on money spent on childcare.

Dependent care benefits are part of an overall employee benefits system as administered by the IRS. A tally of such benefits may be found in box 10 of a taxpayer's W-2 form.

Dependent Care Benefits: Flexible Spending Account

A dependent care flexible spending account is available for individuals who care for a child or adult who is incapable of self-care, who lives in the taxpayer's home for at least eight hours each day, and who can be claimed as a dependent on an income tax return. These accounts allow individuals to pay for qualified child and dependent care expenses while lowering their taxable income. Such FSAs are set up by an employer. Participants authorize their employers to withhold a specified amount from their paychecks each pay period and deposit the money in an account. Instead of using the FSA money to pay for expenses directly, those costs are paid out-of-pocket and reimbursement must be applied for. For more information, such as which expenses qualify and do not qualify, see Investopedia's guide to dependent care FSAs.

Dependent Care Benefits: Child and Dependent Care Credit

The Child and Dependent Credit is a tax credit available to taxpayers who paid for the care of their child, spouse, or dependent so they can work or look for work. For more, see the IRS's Child and Dependent Care Credit informational page, which includes eligibility and timing requirements, how much can be claimed, and information on which forms to complete. As of 2018, taxpayers may claim up to $3,000 worth of expenses for a single dependent ($6,000 for more than one dependent). This tax credit (not a deduction) reduces the tax burden dollar for dollar.

Dependent Care Benefits: Paid Leave

As of 2018, paid family leave was available to about 14% of workers through their employers. Such benefits are available to residents of New York, New Jersey, Rhode Island, Washington, California, and Washington, D.C. Most workers are eligible for the Family and Medical Leave Act (FMLA), which offers up to 12 weeks of unpaid leave per year to care for family members.