Dependent Care Benefits

What Are Dependent Care Benefits (W-2)?

Reported on a W-2 form, dependent care benefits allow employees to withhold pre-tax money from each paycheck to help them pay for costs related to caring for a child, spouse, or another dependent adult living in their household. While the funds must go toward expenses that allow the employee and their spouse to work or look for a job, common uses include childcare, preschool, and adult daycare programs.

Benefits for employees with eligible dependents may also include paid leave to care for someone else and dependent care tax credit.

How Do Dependent Care Benefits Work?

Dependent care benefits are issued via a flexible spending account (FSA) or as a child care tax credit on an employee’s individual tax return. Although people frequently assume that only children can be claimed as dependents, you can receive dependent care benefits for relatives, spouses, and other individuals.

The IRS provides a tool, as well as concrete guidance, to help you determine who qualifies as a dependent. Generally, this person should meet any one of the following criteria:

• A qualifying child younger than 13 years old
• A spouse who's lived with you for more than half the year but is unable to care for themselves due to a physical or mental impairment
• Anyone else who's lived with you for more than half the year but is physically or mentally unable to care for themselves

Only employees with dependents who meet these criteria are eligible for dependent care benefits.

Dependent Care FSA

If an employer offers a dependent care FSA (DCFSA), this is how those benefits work:

1. An employee enrolls in a dependent care benefit program from their employer.
2. Participants authorize a specific amount of money to be withheld from each paycheck within specified FSA limits (up to $5,000 per year). This amount is placed in their flexible spending account.
3. The employee directly pays for care in one of two ways:
   1. They pay for work-related child care and adult care expenses via a specially issued debit card.
   2. They pay out of pocket for the same eligible services and get reimbursed with FSA funds later.

1. Dependent care benefit amounts are treated as an exemption credit with the IRS and recorded in Box 10 on an employee’s Form W-2, Wage and Tax Statement. This is where the amount of dependent care benefits paid or incurred by the company for the employee is documented. 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 the year. They don't usually roll over from one year to the next.

Child and Dependent Care Credit

If you don't offer a dependent care FSA to your employees, they may still qualify for child and dependent care tax 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 child and dependent care credit for full details, which may change from year to year.

State Paid Leave Benefits

Paid family and medical leave (PFML) provisions that help workers care for their family members don't exist under federal law. However, thirteen states plus Washington, D.C., offer this benefit as of 2023, including:

• California
• Colorado
• Connecticut
• Delaware (effective 1/2026)
• Maine (effective 5/2026)
• Massachusetts
• Maryland (effective 1/2026)
• Minnesota (effective 1/2026)
• New Jersey
• New York
• Oregon
• Rhode Island
• Washington

Most employees are eligible for job-protected leave under the Family and Medical Leave Act (FMLA). However, this legislation provides up to 12 weeks of unpaid leave per 12-month period to allow employees to care for loved ones. While paid leave can sometimes be denied depending on the law in a particular state, FMLA requests cannot be denied if the employee has a qualifying reason.

What Are the Eligible Expenses for Dependent Care Benefits?

Eligible expenses for dependent care benefits include:

• Childcare
• Daycare
• Babysitting
• Sick child care
• Nanny or au pair services
• Nursery school or preschool for children below kindergarten
• Before- and after-school programs for children in kindergarten or a higher grade (not summer school or tutoring)
• Summer day camp (not overnight camp)
• Household services related to the dependent's wellbeing or protection (e.g., housekeeper, cook)
• Adult care programs
• Custodial elder care
• Day nursing care
• Disabled dependent care
• Transportation to/from eligible dependent care services
• Registration fees, application fees, and deposits for qualifying programs
• Payroll taxes related to eligible dependent care

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

Why Do Employers Offer Dependent Care Benefits?

Many employers offer a DCFSA simply because it benefits employees and their families. It can be difficult for employees to give their best at work while trying to care for household members, but employer-provided dependent care benefits can help employees balance personal and professional responsibilities. Specifically, company leaders often find that it helps their workforce in the following ways:

• Decreases absenteeism without notice
• Improves employee productivity
• Helps the company attract and retain top talent
• Reduces employee stress
• Helps keep the workplace running smoothly

Although dependent care benefits are for the employee, the advantages of offering them extend beyond the employee’s personal work to help their team and the company. When employees may take planned time off or receive financial support, they can feel more focused, efficient, and at ease at work.

Can Employers Contribute to Their Employees’ DCFSAs?

Yes, employers can contribute to their employees’ dependent care FSAs. Though it's not required, doing so helps reduce the financial burden on your workforce. As of 2023, the IRS limits the combined employer and employee contributions each year to $5,000 per household or $2,500 if married and filing separately.

Here are some reasons for an employer to contribute to a DCFSA:

• It can help you recruit qualified talent.
• It can appeal to current employees, boosting participation.
• It can help reduce employees’ time away from work to care for loved ones.
• It can encourage long-term employee loyalty at your company.

How to Set up a Dependent Care FSA

An employer can set up dependent care FSAs by:

1. Enlisting the company’s insurance/benefits broker: They will design and build an FSA that best fits your company. This plan will include which expenses are covered, how much (if any) the employer contributes, DCFSA limits, and any rules that apply.
2. Educating employees: Help them see the value of this benefit and learn how to use it.
3. Signing off on the plan: Submit a signed administration agreement to your broker and sign their contracts upon legal review.
4. Authorizing contributions with payroll: Employees can withhold a set amount of money from their paycheck to deposit into a separate FSA account, which cannot be changed until open enrollment or a qualifying event (i.e., marriage, birth, divorce, change in employment).
5. Enrolling eligible employees into the program: During open enrollment, employees usually complete an annual election of benefits form and submit it along with their medical enrollment application.

Who Manages Dependent Care FSA Usage?

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 a dependent care FSA program.