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What are Dependent Care Benefits?

By Jeri Sullivan
Updated Feb 06, 2024
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Dependent care benefits are a benefit provided by employers to care for dependents or a tax benefit to offset the cost of having someone else care for dependents while the employee works. A dependent is classified as a natural or adopted child, a parent who a person pays for more than 50 percent of his or her expenses, or any child for which a person has legal guardianship. The most common forms of dependent care benefits are paid leave for dependent care, child and dependent care tax credits, and dependent care flexible spending accounts.

Paid leave is one of the primary dependent care benefits that is employer-specific. In the United States, the Family Medical Leave Act (FMLA) says employers must allow employees the option of taking up to 12 weeks unpaid leave over the period of a year to care for a child, either newborn or adopted. FMLA also includes the same provision to care for children or family members suffering from serious health issues. The law requires the employee's health benefits to remain in place during the 12-week period but the employee does still need to pay his or her portion of the insurance premiums.

Though FMLA requires employers to allow the time off unpaid, many employers provide additional dependent care benefits in the form of paid leave. The most common benefit is for new mothers. Many employers will pay for six to eight weeks of paid maternity leave so new mothers can recover from childbirth and bond with the new baby.

Child and dependent care tax credits are another form of dependent care benefits. The Internal Revenue Service (IRS) provides a credit to help offset the cost of paying someone to care for dependents while a taxpayer works outside the home. To get the credit, taxpayers must submit an IRS form 2441 and provide information regarding who they paid and how much they paid for dependent care. The amount of credit given is determined by the number of dependents cared for, the amount of income claimed, and the amount of dependent expenses claimed.

If the taxpayer claims less than approximately $24,000 US Dollars (USD) per year in income, the tax credit form of dependent care benefits is highly beneficial since it is a credit and not merely a reduction to taxable income. The other form of dependent care benefits related to expenses is the dependent care flexible spending account. Some employers offer this option, which works by allowing the employee to have pre-tax income set aside in a flexible spending account. As dependent care expenses are incurred, the employee can file for reimbursement from his or her flexible spending account.

If the taxpayer chooses to use a flexible spending account, he or she cannot also claim the dependent care tax credit since he or she did not pay taxes on the money reimbursed. Typically, if the taxpayer makes more than $24,000 USD per year in income, the flexible spending account is more beneficial than the tax credit. This is because the amount the taxpayer would get in the credit is less than the amount he or she would have paid in taxes on the same amount of income. By reducing taxable income through the flexible spending account, the dependent care benefits allow the taxpayer to cover the cost of dependent care and the amount the taxpayer has to pay in taxes.

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