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Personal Finance

Smart ways to save on child care costs

The high cost of child care is all too familiar to my family. The monthly cost of care for our toddler typically exceeds $ 1,000 and comes right after our mortgage payment. More than 70% of parents spend at least 10% of their income on child care, and more than half spend at least $ 10,000 a year, according to

The coronavirus pandemic has added to the pressure on working parents. Some have found it difficult to afford care as a result of reductions in wages or hours. Others have changed caregivers or juggled job responsibilities and babysitting duties when schools and daycares closed due to COVID-19. Parents have even left the workforce to care for their children, cutting child care expenses from their budgets but losing income.

Whether you are looking for child care for the first time or re-evaluating your options, make sure you understand the financial implications. A nanny, who comes to your home, is handy. But the average weekly rate for having a nanny for an infant is $ 565, according to, far higher than the average of $ 215 per week for a daycare and $ 201 for a home daycare. One way to cut expenses is to share a nanny with another family, with whom you can share the costs.

Plus, hiring a nanny often has tax implications. If you pay a nanny at least $ 2,300 in 2021, the IRS requires you to treat her like a domestic worker. You must withhold social security and health insurance taxes from the nanny’s salary, and as the employer you must also apply social security and health insurance taxes (you and the nanny each pay 7.65% of salary). You must also issue a W-2 form each January and file other forms with the IRS. And you may need to cover transportation, meals and a two-week vacation, says Dana Levin-Robinson, CEO of Upfront, a price comparison website for child care services.

The expense and tax complications of hiring a nanny were reason enough for me to take my son to daycare instead. Also consider other costs and savings. Daycares and preschools may include snacks and meals in their tariff. But they can also charge an annual fee or penalties if you pick up your child late.

If you earned employment income during the year and pay for care while working or looking for work, you can benefit from a federal tax credit of 20% to 35% of childcare costs (the percentage depends on your income) up to $ 3,000 paid for one child or $ 6,000 for two or more children under the age of 13. You can apply for the credit whether the custody is at home or away, and you must declare the name, address and tax identification number.

Your employer may allow you to put up to $ 5,000 of pre-tax money per year in a flexible dependents’ expense account. You can use the funds to pay for a nanny or daycare while you work, as well as for before and after school programs or a summer day camp. The recently passed COVID relief law includes provisions whereby employers can allow unlimited carry-overs of unused FSA funds from the plan year 2020 to 2021 (and from 2021 to 2022), or extend the grace period for using the funds. FSA 2020 or 2021 from 2.5 months to 12 months.

You can have until the end of 2021, for example, to use the money you put into an FSA in 2020, depending on your employer’s rules. The law also temporarily increases a child’s age limit for eligibility for dependent FSA coverage from 12 to 13 years old.

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