Most parents and child care providers know there is a tax benefit associated with child care costs. From the many emails I am receiving, however, I can see that there is a lot of confusion out there.
Read more for a sample of the questions that are coming in.
> My wife and I are hoping we are eligible for the child care tax credit. We are not positive if our in home day care provider claims the money paid to her as income. She is not licensed at this time. Since you have to provide a TIN or SSN for the provider I am needing to know if she must also claim this income on her taxes? [Alison: She should. The IRS will know that she has child care income if you claim the credit.]
> We pay someone a total of about $700 a month to watch our daughter, but because she's not licensed is there any way for me to deduct these child care expenses for my tax return? [Alison: Yes. Licensing is really not an issue. See below.]
> My son's child care provider has refused to give me her tax id number. I have terminated care because I suspect she is committing tax fraud. How do I get her number to claim on my taxes? [Alison: Give her a From W-10. Read more about this below.]
> Can a daycare provider refuse to provide a social security number if you owe them money? [Alison: See below. Whether the provider refuses or not, you can still claim the credit.]
> Do you know the amount that parents are allowed to deduct for their childcare payments for each of their children? [Alison: It's a credit and the amount varies. See below.]
> What is the official date by which my child care provider must give me the W2 form so that I can file my taxes? January 31st? I left the child care on not good terms and am wondering how long it will take for them to send out the forms. [Alison: Actually, your child care provider is not required to give you anything, but if you give her a Form W-10, she is required to complete it. See below.]
Information for Parents:
You generally need the provider's tax id number and other information to claim the Form 2441 Credit for Child and Dependent Care Expenses. This is a credit, which is better than a deduction, because it can reduce your income tax dollar for dollar.
To get your child care provider's tax id number, give the provider an IRS Form W-10, Dependent Care Provider's Identification and Certification, which she is required by law to fill out and return to you. If the provider is uncooperative, let her know that the penalty for not providing the information requested on the W-10 is $50 and that you intend to claim the credit whether she gives you her tax id number or not.
There is a way to file Form 2441 and claim the Dependent Care Credit without the provider's tax id number, so don't worry if you can't get it from her. Some providers are concerned because they aren't licensed and others want to avoid paying taxes on their income. To claim the Dependent Care Credit without a tax id number, follow the Form 2441 instructions for Line 1 under "Due Diligence" on page 2.
If you are otherwise on good terms with your child care provider, and especially if you want to continue using the provider's services, I recommend you try to discuss the situation. The provider should be reporting all taxable income. You can claim the credit either way, however.
Calculate the Dependent Care Credit based on child care payments you made during the year for the care of qualifying children under age 13 while you worked or actively looked for work. You can use up to $3,000 per child to calculate the credit. The maximum credit varies according to income level, from a low of $600 to a high of $1,050 per child, with the highest credits going to low income parents.
Information for Child Care Providers:
You are not required to provide any particular form to parents at the end of the year.
If a parent gives YOU an IRS Form W-10, Dependent Care Provider's Identification and Certification, however, you must complete the form and return it to them. You can face a $50 penalty for not giving your correct tax id number or for refusing to fill out the form.
I highly recommend that you be proactive and prepare a receipt for parents at the end of each year which includes your tax id number. This will help parents and reflect well on your business.
You are required to report child care income on your annual income tax return. The information obtained from parents' Form 2441 could be used by the IRS to identify your taxable income, though I have so far not seen this done in any automated fashion.
If you haven't applied for or received a child care license (and one is required), you will not be allowed to claim home expenses as a business deduction on your income tax return. Other than this, social service licensing does not concern the IRS, though they care very much that you report all of your income. (And pay any resulting taxes.)
Last updated on 3 February 2012