As a small business owner, you work long hours to keep your company running. If you have children or dependents, you might need help providing care while you work. But, child and dependent care expenses can add up quickly. Did you know the IRS offers some relief for these costs? The Child and Dependent Care Credit is the answer to this problem.
What is the Child and Dependent Care Credit?
The Child and Dependent Care Credit reduces your federal tax bill if you paid for the care of a dependent. You can claim the credit if your dependents were cared for while you were working. The credit is worth 35% of qualifying expenses up to $3,000 for one dependent and $6,000 for two or more dependents.
Do you meet the Child and Dependent Care Credit requirements?
There are several qualifications to consider before you claim the Child and Dependent Care Credit.
The child care must be provided so that you could go to work or look for work. As a small business owner, you claim the credit on your personal income tax return, using your adjusted gross income.
Your tax filing status must be single, married, filing jointly, head of household, or widow/er with a dependent child.
The child care also plays a role in how much of the credit you receive. You cannot claim the credit if you made payments to the following people for child or dependent care:
- a spouse
- the parent of the qualifying dependent
- a dependent
- your child who will be under 19 years old at the end of the year
Day camp costs count toward the child and dependent care credit if you worked while your dependents received care. But, if your dependents were at an overnight camp, the costs are not applicable for the credit. You can only claim day camp expenses.
What is a qualifying dependent?
The qualifying dependent is the person who receives the care. A qualifying dependent is your dependent child. The dependent must be under 13 years old at the time of the child care.
A qualifying dependent could also be a spouse or dependent who is 13 years old or more. The spouse or dependent must be physically or mentally incapable of self-care. The individual must have lived with you for more than half of the year to meet the requirements.
How much can you claim?
The Child and Dependent Care Credit won’t cover all your childcare costs. You can claim a credit on a percentage of your total care expenses. You will need to have records of your payments toward the care.
You can use up to $3,000 of expenses for one qualified person each year. Or, you can use up to $6,000 for two or more qualified people each year.
Once you determine the care costs you want to claim, you take a percentage of that amount. The credit is between 20% and 35% of your allowable expenses. The percentage you receive depends on your adjusted gross income.
If your income is below $15,000, you get the full 35%. That means that if you had $3,000 of care expenses for your child, you would receive a $1,050 credit. The largest credit you can get is $1,050.
The percentage you get drops by 1% for every extra $2,000 of income. It continues to lessen until the income reaches 20%, or $43,000. That means that if your income is $43,000, you get 20%. If you had $3,000 of care expenses for your child, you would receive $600.
The Child and Dependent Care Credit is not refundable. The credit can take your tax bill to zero, meaning you don’t owe any taxes. But, you cannot receive the leftover amount of the credit as a refund. Let’s say you owe $700 in taxes and you get a credit of $1,000. You can use the credit to erase your tax liability. But, you do not receive a refund for the remaining amount of $300 ($1,000 -$700).
Do your dependents receive care at your home? If you pay someone to care for a dependent at your home, you may be a household employer. You can use the IRS Publication 926 to help you with household employment rules.
How do you claim the credit?
Claim the Child and Dependent Care Credit with the IRS Form 2441. Attach the form to your personal income tax return.
On Form 2441, submit the care provider’s name, address, and tax identification number. If the care provider is an individual, the tax ID number is their Social Security number. You can use Form W-10 to request information from the care provider.
If the care provider is tax-exempt, you don’t need a tax identification number. You just need to write “tax-exempt” on Form 2441. A tax-exempt child care provider might be a church or a school.
You cannot claim the credit on more than one tax return. If a dependent was claimed more than once, the IRS applies tie breaker rules. The tie breaker rules determine which taxpayer gets to claim the dependent.
If you’re married, the IRS requires you and your partner to be working or looking for a job to claim the credit. There are two exceptions. Your spouse can be a full-time student, or physically or mentally incapable of self-care.
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