Using Dependent Care FSA to pay a relative for babysitting
Doctors have advised us that our daughter should not attend daycare until after she's a year old. Not anticipating this, I had elected for Dependent Care FSA from my company pay. I'd now like to pay my mother to watch our daughter, but am not sure how to do this so I can use these funds. Has anyone paid a family member for care this way? Thanks!
Jul 27, 2017
Parent Replies
Shouldn't matter if the nanny is family or not. As long as you pay above the table, i.e. withholding taxes and paying social security, you should be able to get reimbursed from your FSA.
You'll need to check with your employer's benefits administrator about how, specifically, to get the money out of the DCFSA account, but it's usually pretty easy - just a form you submit, which will likely require your mother's address and social security number, along with receipts or some other evidence of what you actually paid her. (You have to pay first, and then you can be reimbursed from the DCFSA.) Generally, you don't have to deal with "nanny taxes" if your nanny is your parent - unless you are divorced or widowed or your spouse is disabled (which makes no sense, but those are the rules! See IRS Pub. 926) but your parent does have to report the pay as a "household employee" on her income taxes. This assumes your mom comes to your house and is paid as your employee; if instead she cares for your child at her own home, more like an in-home daycare, she might be considered self-employed; this shouldn't change anything for you but it affects her taxes.
I'm not 100% sure, but I'm fairly certain that it can happen IF your relative is your employee or is an independent contractor operating as his/her own business (ie they need a tax ID number), as the family member must pay taxes against the income they receive from the FSA. It can't be the spouse or the child's parent though (so like your partner couldn't get FSA funds for taking care of his/her own child). I think IRS publication 503 provides the background on this.
We've done this the past two summers. We paid my sister for watching our daughter for several weeks. She provided us with an invoice that included her name, address, social security number, the dates of care and the cost of care. We paid her and then got reimbursed from our FSA. No questions asked.
Just to be sure you have alll bases covered, shell have to file the income on her taxes, and you'll need to have worker's compensation insurance that covers her.