How to Pay Your Nanny With a Dependent Care FSA

To pay your nanny with a Dependent Care FSA, you put the nanny on the books as your household employee, elect pre-tax contributions through your employer’s plan (up to $7,500 per household in 2026 under the One Big Beautiful Bill Act), and then submit claims to your plan administrator as care is provided, with the nanny’s name, address, and taxpayer identification number on every claim.¹ The account itself is straightforward. The obligations that come with hiring a nanny are what trip families up, so work through them in order before your first claim goes in.

Put Your Nanny on the Books First

A nanny working in your home, on your schedule, using your supplies is almost always your employee, not an independent contractor. The IRS looks at who controls what work gets done and how. You set the hours, the location is your home, and you direct how the children are cared for. That is employee status.²

Classifying your nanny as a contractor to skip payroll taxes is the most common and costly mistake in this area. The IRS can assess back taxes, penalties, and interest if it finds a misclassification. Just as important for FSA purposes: your plan administrator needs proof the nanny is a legitimate provider, and paying someone off the books makes reimbursement impossible.

Before you run any payroll, get a federal Employer Identification Number (EIN). The fastest route is the IRS online application on business days; Form SS-4 is the alternative.³ Your DCFSA administrator will ask for this number when processing claims.

Payroll Taxes You Owe as the Employer

If you pay a household employee $3,000 or more in cash wages during 2026, you owe Social Security and Medicare taxes on those wages. Social Security is 6.2% from you and 6.2% from the nanny (12.4% total) on wages up to $184,500. Medicare is 1.45% each, with no wage cap.⁴ You can withhold the nanny’s half from each paycheck or pay it yourself, but you owe both halves to the IRS either way.

If you pay $1,000 or more in total cash wages to household employees in any calendar quarter of 2026, you also owe Federal Unemployment Tax (FUTA). The tax applies to the first $7,000 of each employee’s wages at 6.0%, and a credit of up to 5.4% for state unemployment contributions typically drops the effective rate to 0.6%. FUTA comes entirely out of your pocket.⁴

Many states also require registration for state unemployment insurance and may require workers’ compensation coverage for household employees. Check your state labor department before your first pay date.

Contribution Limits and How the Money Flows

The One Big Beautiful Bill Act raised the DCFSA maximum exclusion from $5,000 to $7,500 per household for tax years beginning after December 31, 2025. Married taxpayers filing separately are capped at $3,750.¹ The limit is per household, not per child or per provider. If both spouses have access to a DCFSA through their jobs, the combined contributions still cannot exceed $7,500 on a joint return.

A second cap sits on top of the dollar limit: your contribution cannot exceed the earned income of the lower-earning spouse. If one spouse earns $6,000 and the other earns $80,000, the household can exclude only $6,000.¹

Two features of the account itself shape how much you should elect. First, unused money at the end of the plan year is generally forfeited. Some employer plans offer a grace period of up to two and a half months to incur and claim additional expenses, and most DCFSA plans do not permit unused funds to roll into the next year. Overestimating by $1,000 means losing $1,000. Estimate conservatively in your first year.

Second, reimbursement is pay-as-you-go. Unlike a health care FSA, a DCFSA only reimburses up to the amount you have already contributed. If you elected $7,500 for the year but only $1,500 has been deposited by March, that is your March ceiling. Any excess claim sits with the administrator and pays out as future payroll deductions arrive.⁵ Early-year nanny costs can be steep while your balance is still building, so budget accordingly.

What the Account Actually Covers

The IRS reimburses care for a “qualifying individual.” For nanny arrangements, that usually means a child under 13 whom you claim as a dependent.⁶ A spouse or other dependent of any age also qualifies if they cannot care for themselves physically or mentally and live with you more than half the year.⁷ Once a child turns 13, nanny expenses for that child stop being reimbursable.

The care must let you work or actively look for work. If you’re married, both spouses must be working or job-searching, with exceptions for a full-time student spouse or one unable to provide self-care; in those cases the IRS treats the non-working spouse as having earned $250 per month for one qualifying dependent, or $500 per month for two or more.¹ Hours when neither parent is working or looking for work do not produce reimbursable expenses, even if the nanny is on the clock.

You cannot use DCFSA funds to pay someone you or your spouse claims as a tax dependent, and you cannot pay your own child who is under 19.¹ Publication 503 extends this to your spouse and to the other parent of a qualifying child under 13. The nanny needs a valid Social Security Number or ITIN because the IRS requires the provider’s name, address, and taxpayer identification number on your return.

Nanny wages for watching your children during your working hours are the core qualifying expense. If your nanny also cooks or cleans, those costs can be included when they are partly for the qualifying person’s well-being and the arrangement is primarily for the child. Common expenses that don’t qualify:

Overnight camps (day camps do qualify).
Kindergarten and school tuition, even for half-day programs; before- and after-school care is eligible.
Music, dance, swimming, and similar lessons, which the IRS treats as educational.
Food and clothing, even when purchased by the nanny.

Filing a Claim

Before submitting your first claim, gather the nanny’s full legal name, current address, and Social Security Number or ITIN, plus your EIN and records showing the dates of service and amounts paid for each pay period. Ask the nanny to sign or otherwise confirm that payment was received as described.

Most administrators offer an online portal for uploading a claim form with supporting documentation like pay stubs or signed receipts. Mobile apps that accept photographed receipts are common, and paper submission by mail still works. Electronic claims are often processed within a few business days, with payment by direct deposit or check.⁸

One timing rule catches people out. Expenses count in the year the care is actually provided, not the year you pay the bill. Prepaying in December for January care puts those expenses in the following year’s DCFSA.⁹

Year-End Filings

The account and the household employer obligations both come due at tax time. You need:

A Form W-2 furnished to your nanny by January 31 (or the next business day if that falls on a weekend), with a copy filed with the Social Security Administration.³
Schedule H, attached to your Form 1040, reporting the Social Security, Medicare, and FUTA taxes you owe as a household employer.¹⁰
Form 2441, which lists your care provider and reconciles your DCFSA benefits with any Child and Dependent Care Tax Credit.¹¹
Your own W-2. Box 10 shows the dependent care benefits paid through the plan year, and it should match your DCFSA records.

You cannot claim the same dollar through both the DCFSA and the Child and Dependent Care Tax Credit. If total care costs exceed what you run through the FSA, leftover expenses may still qualify for the credit.¹² The credit’s expense caps ($3,000 for one qualifying individual, $6,000 for two or more) are reduced by the amount you excluded through the DCFSA. Contribute the full $7,500 with one qualifying child, and no room for the credit remains; with two or more children and total costs above $7,500, some room may remain.

Skipping Schedule H when you pay your nanny more than $3,000 in 2026 sets up a mismatch. The IRS will eventually notice the missing W-2 against your DCFSA claims, and the combination of back taxes, penalties for failure to withhold, and potential disqualification of your DCFSA exclusion makes this the most expensive shortcut a household employer can take.⁴

1
Office of the Law Revision Counsel. 26 U.S. Code 129 – Dependent Care Assistance Programs
2
Internal Revenue Service. Independent Contractor (Self-Employed) or Employee?
3
Internal Revenue Service. Topic No. 756, Employment Taxes for Household Employees
4
Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
5
FSAFEDS. FAQs
6
Office of the Law Revision Counsel. 26 U.S. Code 21 – Expenses for Household and Dependent Care Services Necessary for Gainful Employment
7
Internal Revenue Service. Child and Dependent Care Credit Information
8
FSAFEDS. Dependent Care FSA
9
Internal Revenue Service. Publication 503 (2025), Child and Dependent Care Expenses
10
Internal Revenue Service. About Schedule H (Form 1040), Household Employment Taxes
11
Internal Revenue Service. Instructions for Form 2441 (2025)
12
FSAFEDS. FAQs