Home FSA - Dependent Care : some ques?

[janinegirly]

This is probably more for those who''ve used this benefit or are tax accountants. My company offers this option pre-tax (deductions from my pay check) and also will match 50 cents on the dollar. Amounts tops out at 5K per IRS guidelines. In my case I am going to be paying my mother who watches my daughter while I work.

My question is how is this handled at tax time? Is it considered income for my mother which she reports, gets w-2? I asked my company but they were very hands off ("contact your tax accountant") but indicated it would be reported as income on my pay stub. So does that mean it isnt'' really pre-tax since I''d be paying income tax on it--and if so does the receipient (my mother, daycare,etc) not have to report?

Thanks..figure the smart ladies here probably know all about it

 

[curlygirl]

janine, I agree that you should speak to your accountant about this. My situation is different because we use an actual child care facility and can provide receipts, tax id #, etc. From what I can tell, it is not considered taxable income on my pay stubs--it is taken out along with 401k and health care FSA. I have friends who pay their nannies "off the books" and they unfortunately are unable to use the dependent care FSA because they would then have to treat their nannies as true employees and take out taxes, offer benefits, etc. You should definitely talk to a professional about it.

 

[MustangGal]

I just signed up for it this year, so I looked into it a bit.

The income will be taxable for your mother, so you''ll have to check with her and see if it might be easier to just keep it under the table. For you it will come out pre-tax, and it''s awesome that you''re company matches!

Your mother doesn''t have to have an official tax ID# to file, my sitter just uses her SSN, but she must state it as income. When you get the money out of the DCSA you''ll have to produce some type of reciept, so those can serve as her proof of income. She won''t get any W-2 or anything official, and no taxes will be taken out as you pay her, so she''ll need to keep that in mind.

It might still be best to consult a professional, just to be sure you do it all correctly.

 

[janinegirly]

Thanks Mustang and Curly.

I think you are right Mustang--it must be reported as income by my mother. I guess better tell my dad since he is the one with regular income so hope this doesn't create issues (although not sure how it would). I jsut thought it would be a win win since I can reimburse my mother at a lower cost to me (pre tax) not to mention matching by my company. As it is I do give her money each month so I thought this way I could give her more since it's basically free money to me and far less than daycare would be. She has been watching her regularly for over a year so to me this is a good time to set something up on a consistent basis.

In terms of nannies being paid under the table--I wonder if it's because these nannies cost less (since they are unreported) and by utilizing FSA you must supply an SSN which means there would then be a trail. My mother obviously doesn't require benefits from me..so I don't know if it's the same situation? Hmm, so confusing.

We don't have a tax accountant yet, but once we do I'll def ask. Just thought I'd ask around here since it's only affected one paycheck so far so I can unwind things quickly if I had to.

 

[MustangGal]

If you already signed up for it, it may not be possible to get out of it until next open enrollment. Being a pre-tax benefit makes it subject to Section 125 IRS rules (can''t make changes unless you have a qualifying event). I know I checked that when I opted it, since I wanted to be able to cancel if DH lost his job or something where I wouldn''t need to pay for day care.

The only real change for your mom would be the income level, they may just want to either have your dad have more taxes withheld, or set some money aside to cover whatever they would owe for income taxes on that amount of income.

 

[janinegirly]

mustang, yea I probably should look into rules re: canceling enrollment, but I know I can make changes to the amount deducted, so I think I can always adjust it down to zero some months. Maybe I''ll give it a try (and change it back) just to see if it lets me.

I''m thinking tax on 5K (which would be the max) can''t be that much or cause grief on income taxes so so far it still seems like an overall big plus, unless I''m missing something.

 

[janinegirly]

hmm, think you''re right mustang about not being able to change amounts unless a qualified event happens. Guess this is what happens when they outsource our benefits dept offshore--I get the wrong information!!

i suppose i could state that my mother stopped watching her so that would be a change in status. Or I wonder if I can pay her less than I deducted and then use the available balance to offset daycare costs should we switch to that eventually this year. If not will just pay remainder to her at end of year so she can offset taxes!

 

[swingirl]

Date: 1/19/2010 10:30:03 PM
Author: janinegirly
hmm, think you''re right mustang about not being able to change amounts unless a qualified event happens. Guess this is what happens when they outsource our benefits dept offshore--I get the wrong information!!

i suppose i could state that my mother stopped watching her so that would be a change in status. Or I wonder if I can pay her less than I deducted and then use the available balance to offset daycare costs should we switch to that eventually this year. If not will just pay remainder to her at end of year so she can offset taxes!

The events that qualify a change are things like the loss of employment, addition to the family, marriage, death. They are determined by the IRS and you need documentation to prove it. The change in status isn''t just a "I changed my mind".

When I used the Dependent Daycare option I had to turn in receipts proving that I paid the daycare provider and I had to supply the SS number of the provider. Your mother will need to report her income just like anyone who is self-employed. Your HR department should have a lot more information for you if they are offering this as a benefit.

 

[janinegirly]

swingirl: unfortunately our benefits dept was sent offshore (india) so commuication is not clear and I was given misleading info for sure. Regardless "change in provider" is considered an acceptable reason with regards to changing amounts deducted (which can go down as far as zero). I''m just not sure if saying a relative decided to stop watching or is no longer able (which to me does make sense) is sufficient or what they would need from me. I have this ques out to my benefits dept..should hear back in 72 hrs

.

Still these questions are more for information or in case the payments turn out to not be beneficial from my mother''s perspective-- which so far is not the case. I also enrolled with the expectation that we will be using daycare towards the end of the year, although nothing is ever certain until it actually happens. So whatever leftover $ is in the balance would certainly be eaten up by that.

 

[curlygirl]

Date: 1/20/2010 2:53:22 AM
Author: swingirl

Date: 1/19/2010 10:30:03 PM
Author: janinegirly
hmm, think you're right mustang about not being able to change amounts unless a qualified event happens. Guess this is what happens when they outsource our benefits dept offshore--I get the wrong information!!

i suppose i could state that my mother stopped watching her so that would be a change in status. Or I wonder if I can pay her less than I deducted and then use the available balance to offset daycare costs should we switch to that eventually this year. If not will just pay remainder to her at end of year so she can offset taxes!

The events that qualify a change are things like the loss of employment, addition to the family, marriage, death. They are determined by the IRS and you need documentation to prove it. The change in status isn't just a 'I changed my mind'.

When I used the Dependent Daycare option I had to turn in receipts proving that I paid the daycare provider and I had to supply the SS number of the provider. Your mother will need to report her income just like anyone who is self-employed. Your HR department should have a lot more information for you if they are offering this as a benefit.

Ditto what swingirl said. From what I understand, you can't just change the amounts unless you have experienced a life changing event--this holds true with all FSA, dependent care or health. Once you've determined the amount you will have deducted per pay period, it can only change if there is a qualifying event such as birth or adoption, marriage, death, change in employment status, etc. Maybe your company does it differently so you should definitely talk to your HR people and an accountant.

 

[janinegirly]

Thanks Curly--the below is the permitted change in status I''m focused on (taken from our Benefits packet) . This is in addtion to the major life events of course that you referred to.
• A change in dependent care provider, or the amount paid to
the provider, (other than a relative) may permit you to
increase or decrease your annual election or to enroll or
terminate the plan
• Dependent no longer in day care

I''m def going to confirm with HR/Benefits, that should be fun! The mention of "other than relative" refers to change in costs not change in provider. I''ll post updates here in case anyone else is interested. I''ve def already learned alot, thanks all!

 

[curlygirl]

janine, that''s cool that your company is more flexible. I just looked at my benefits packet and in answer to the question: "Can I change my contribution amount during the plan year?" it says: "Only if you have a change in status such as marriage, birth, adoption, or a change in your or your spouse''s employment status." Luckily, I max mine out every year (within 2 months!)with 2 kids in daycare so it''s not an issue for me! But you are very fortunate that your company is more lenient with the rules. I hope your HR people get back to you soon!