A DCFSA can save money for you and your employees: When an employee contributes to a DCFSA with pre-tax dollars (through automatic payroll deductions that you allow), they reduce their taxable income. Less taxable income for your employees means less payroll taxes for you.
Use a DCFSA to be reimbursed for:
- Licensed day care facilities
- Preschool programs
- After-school programs
- In-home child and dependent care services
- Babysitters if the babysitting is to allow the parent to work
- Elder care Dependent care expenses for tax dependents over the age of 13 require proof of medical necessity
- Day camp expenses if not educational in nature
- Certain application fees
During COVID-19, many people have hired relatives or friends to watch children while the parents are at work. This is an eligible expense for DCFSA reimbursement as long as the friend or relative isn't your spouse, the parent of the child, your dependent, or your child under age 19.
If your family member is your employee and no exceptions apply, then you're generally responsible for withholding and paying income and employment taxes. If your family member isn't your employee, then the family member will generally be responsible for paying income taxes and any applicable self-employment taxes on the income earned.
Examples of expenses not eligible for DCFSA reimbursement:
- Private tutors
- Lunches and food items
- Education programs
- Overnight camp
- Tuition for kindergarten and higher grades
- Activity fees
- Summer school
- Music and dance lessons
- Swimming lessons
- Virtual day care and virtual day camps
Dependents over the age of 13
There are times when your employees' tax dependent is over the age of 13 and, because of a medical reason, requires day care so your employees can work. The IRS allows reimbursement from the account for these expenses when the following requirements are met:
- The dependent receiving the care is unable to provide the care themselves due to a physical or mental disability. A letter of medical necessity from a qualified medical professional is required to show there is a medical need for the care.
- They live in the home more than 8 hours a day
- They can be claimed as the member’s tax dependent