This post had “Coming soon” as its text for way longer than I’d intended. Why? Because with kids in the picture, things never go as planned. Fortunately for the part of this that was due to a kiddo being home sick for 4 days in a row, from a child care perspective we got very lucky that 3 of those four days we were already scheduled to have an adult home with the kids (long school weekend). And on that fourth day, fortunately my husband’s work schedule was amenable to being abandoned for the day.

But that’s not always the way it works out. Sometimes you need other care options, and you may not have a convenient grandma or stay at home neighbor to help you out, so you need help you can hire. Sometimes that’s for on a regular basis when you’re at work, and sometimes that’s for an irregular basis like when your own daycare provider is closed or your kiddo is too sick to go to daycare/school.

So let’s talk about that every day scenario. Where ever you live, daycare is likely expensive. Remember that taxes are the government’s way to incentivize behaviors, so it shouldn’t surprise you that there’s a governmental form of encouragement to have all the household parents working.

Indeed, there are actually two forms of incentive. The first is in the form of a child care tax credit (up to $3k for 1 child, up to $6k for >=2 children). This is claimed on your tax return, after the tax year is done.

There’s also dependent care flexible spending account option (DCFSA). That’s up to $5k per household, if your employer offers this option, and you have to commit to it in your open enrollment period so it an come out of your paycheck and be reimbursed during the year. It’s use-it-or-lose-it money, but since this is one of those tax incentives implemented in the 1980’s and NOT indexed for inflation, families tend to find it very easy to spend the whole allotment.

These two tax incentives interact, so you don’t get $6k+$5k=$11k worth of tax incentive for your kiddos, sorry. If you’re going to have at least $5k of daycare expenses for 1 kiddo, the best option is generally the DCFSA for the full $5k. If you’re going to have >=2 children in daycare, the full $5k from the DCFSA is a good choice, and you can tack on to it up to an additional $1k from the child care tax credit (but you have to have >>$1k in additional expenses, and how much depends on your income).

Now remember how we started this article talking about needing contingency plans? Well, you may be lucky enough to have employer-sponsored contingency plans (like sick kid daycare and backup daycare)! These may be good options for getting you to work, often with small or $0 copays (beware of small capacity and limits on uses per year). But here is where government “kindness” aka incentivization runs out. The “full market value” of those employer-sponsored contingency plans is considered in your maximum of $5k the IRS allows for your family for the year. If you’ve already used up the $5k on allocations to your Dependent Care Flexible Spending Account, and then use your employer’s sick kid daycare, the full market value of the sick kid daycare is considered additional taxable income for your paycheck.

The full market values of these resources were shockingly high to me, ballpark backup daycare at $150 per child per day, and sick kid daycare at $200 per child per day.

That “additional income” will then be taxed at your marginal tax bracket, and it’s subject to Social Security and Medicare taxes.

Let’s walk through an example.

• You’re in the marginal federal tax bracket of 22%
• You’re in the marginal state tax bracket of 6.8%
• There’s Social Security tax of 6.2%
• There’s Medicare tax of 1.45%
• So your total marginal tax rate is 22%+6.8%+6.2%+1.45%=36.45%
• You have 2 kids, and with $25k in annual daycare bills you were happy to sign up for the full $5k DCFSA through your employer.
• But your daycare provider was on vacation for 2 weeks, so you needed 5x2x2=20 days of extra care there. If that’s $25/family/day in copays, there is the known and relatively cheap cost of 20x$25=$500 in copays. The “additional income” from the full market value of those days is 20x$150=$3000, taxed at 36.45%, so you had an additional tax cost of $3000×0.3645=$1093.50. This backup service cost you almost $1.6k.
• And your kids were each sick 5 days during the year, so 10 days when you needed sick kid care. No copay here, but the “additional income” from the full market value is 10*$200=$2000, taxed again at 36.45%, for an additional tax cost of $2000×0.3645=$729.
• That means the those 15 (if both kids were always sick on the same days) to 20 (if they were never sick on the same days) extra days of going to work cost you ~$2.3k, or $115-$150/day. Making the right connections, or having a different backup system (daycare providers around here charge <=$50/day), can sure save you a lot of money vs using employer-sponsored options.

But don’t forget, as you get to higher income levels, you can cross into some rather unpleasant phase-outs or new taxes. So if you are in just the wrong spot income-wise, and you’ve got one of those jobs where you can’t just take the day off to stay home with your sick child, it’s possible your use of these daycare services will cause you to be bumped into the Roth IRA phase-out range, or you’ll also start paying Additional Medicare Tax or Net Investment Income Tax, or maybe you will phase out of a tax credit. Prior to the TCJA, it may have pushed you into AMT-land.

As Open Enrollment for many companies is approaching its close, the Dependent Care Flexible Spending Account is a useful tax break for working families. Just make sure you understand the other tax implications life with children and work may have on your budget.