Dependent Care Benefits (W-2)

What Are Dependent Care Benefits (W-2)?

Dependent Care Benefits (reported on a W-2 form) is an option employers can provide for their employees for the purpose of withholding pre-taxed money from each paycheck to help pay for the care of a child, spouse, or other dependent adult who lives in their household. Such benefits need to be work-related and may include child care, preschool, elder care, transportation to/from eligible care, and paid leave for taking care of a dependent. 

How Do Dependent Care Benefits Work?

This benefit is issued via an FSA (Flexible Spending Account) or as a child care tax credit exemption credit on an employee’s individual tax return. 

Dependent Care FSA

If you’re offering your employees a dependent care FSA, this is how dependent care benefits work:

1. An employer provides dependent care benefits to employees through an FSA.

2. Participants authorize a specific amount of money (up to $5,000 per year total, including all employer and employee contributions) to be withheld from each pay period’s paycheck. This amount is placed in their Flexible Spending Account.

3. An employee pays out of pocket (often via a specially issued debit card) for expenses related to work-related child care, elderly care services, and disabled person care. This money is counted as pre-tax, which means it reduces the employee’s income tax amount.

4. An employee applies for a reimbursement that comes from the FSA’s funds.

5. Dependent Care Benefit amounts are treated as an exemption credit with the IRS and are recorded in box 10 on an employee’s W-2 form, where the amount of dependent care benefits paid or incurred by the company for the employee is recorded. This would include the fair market value of the employer-provided or employer-sponsored benefits, and the amounts paid for them.

Please note, dependent care FSA funds cannot be returned and must be used within a specified time frame. 

Child and Dependent Care Credit

If you do not offer a dependent care FSA to your employees, they may still qualify for the Child and Dependent Care Credit. Employees who pay out of pocket for work-related dependent care expenses can claim this exemption on their yearly tax return. The limits for total expenses reported are $3,000 for one dependent and $6,000 for two or more dependents.

See the IRS information page about the Child and Dependent Care Credit for full details, which may change year to year. 

What Are the Options for Dependent Care Benefits?

The options for Dependent Care Benefits include:

• Child care

• Daycare

• Babysitting

• Nursery school, preschool (not private school, summer school, or tutoring)

• Sick child care

• Nanny, au pair (not housekeeping or child support payments)

• Before and after school programs (not music or sports lessons)

• Summer day camp (not overnight camp)

• Adult Care

• Custodial elder care

• Day nursing care

• Disabled dependent care

• Transportation to/from eligible dependent care

• Registration fees for child/adult care

• Payroll taxes related to eligible dependent care

The people who qualify as a dependent are children under 13 years old, a spouse, parents, or other tax-dependent adults who live with you and are unable to physically or mentally care for themselves.

How Can an Employer Set Up Dependent Care FSAs?

An employer can set up dependent care FSAs by:

1. Enlisting the company’s insurance/benefits broker to design and build an FSA that best fits the vision of the company. This plan will include which expenses are covered, how much (if any) the employer contributes, the employee contribution limits, and any rules that apply.

2. Educating employees on the value of this benefit and how to use it.

3. Submitting a Signed Administration Agreement to your broker and signing their contracts upon legal review.

4. Authorizing employees to withhold a set amount of money from their paycheck to have it deposited into a separate FSA account. This amount cannot be changed until open enrollment time, or within 31 days following a qualifying event (i.e., marriage, birth, divorce, change of employment).

5. Enrolling eligible employees into the program during open enrollment by using the Annual Election of Benefits Form and submitting it along with their medical enrollment application.

Can Employers Contribute to Their Employees’ Dependent Care FSAs?

Yes, employers can contribute to their employees’ Dependent Care FSAs, though it is not required. The IRS limits the combined employer and employee contributions per year to $5,000 if the employee is married or $2,500 if filing a separate return. 

Reasons why an employer may want to contribute are that such FSAs:

• Help recruit qualified talent.

• Appeal to current employees.

• Help to reduce employees’ time away from work in order to care for dependents.

• Allow employees to be more dedicated, focused, and productive while at work.

• Encourage long-term employee loyalty.

Who Is Responsible for Managing Use of a Dependent Care FSA?

The company’s chosen insurance/benefits broker, the company’s HR and payroll departments, and the employees themselves are all responsible for properly and legally managing use of a Dependent Care FSA.