How to Use a Dependent Care FSA for Nanny Payments

A Dependent Care FSA for nanny expenses lets you pay a qualifying caregiver with pre-tax dollars through your employer’s plan, cutting your childcare cost by roughly 25 to 40 cents on the dollar depending on your tax bracket. Starting in 2026, the annual exclusion limit rises to $7,500 for joint filers, heads of household, and single parents, up from the $5,000 cap that had stood since 1986.¹ Married-filing-separately households are capped at $3,750. Using the benefit correctly means picking an eligible caregiver, documenting expenses the way the plan administrator wants, and handling the household payroll taxes that come with putting a nanny on the books.

How Much You Can Contribute for 2026

The One Big Beautiful Bill Act raised the DCFSA exclusion limit to $7,500 for the 2026 plan year.¹ Money you contribute comes out of your paycheck before federal income tax, Social Security, and Medicare taxes are calculated.

Your actual contribution can’t exceed the lesser of your earned income or your spouse’s earned income for the year. If you earn $45,000 and your spouse earns $6,000 part-time, the household cap is $6,000 regardless of the statutory maximum. This earned-income test catches households where one parent works significantly fewer hours than the other.

Both spouses in a joint-filing household must be working or actively looking for work during the hours the nanny provides care.² Two exceptions apply: a spouse who is a full-time student for at least five months of the year, or a spouse who is physically or mentally incapable of self-care, is treated as having earned income of $250 per month for one qualifying person or $500 per month for two or more.³

You normally elect the amount during open enrollment. Hiring a new nanny or absorbing a significant rate increase from your current one counts as a qualifying life event, letting you adjust your election mid-year if you notify the benefits administrator within the window your plan sets (commonly 30 to 60 days).⁴

Who Your Nanny Can Be

Care must be for a child under 13 you claim as a dependent, or for a spouse or dependent of any age who is physically or mentally unable to care for themselves and lives with you for more than half the year.³ The day your child turns 13, further expenses that year become ineligible.

You cannot pay any of these people with DCFSA funds:⁵

Your spouse.
The child’s other parent.
Your own child under age 19, whether or not a dependent.
Anyone else you claim as a dependent on your return.

Relatives outside those categories are fine. A grandparent, an aunt, or an adult sibling you don’t claim as a dependent can be your paid caregiver.

Which Nanny Costs Qualify

The expense has to exist so you and your spouse can work or look for work. Wages your nanny earns while you’re at your job, commuting, or job hunting qualify. Care provided so you can go out socially does not.

Costs that trip up parents:

Day camps count; overnight camps don’t.⁶
Once your child is in kindergarten or higher, tuition itself isn’t eligible, but before-school and after-school care still is.
Late fees or penalties charged by a nanny or agency aren’t care expenses.
For a live-in nanny, only the portion of compensation tied to childcare services counts. The fair market value of free room and board you provide isn’t reimbursable.

Documenting Claims So They Get Paid

Collect your nanny’s identifying information before your first claim. IRS Form W-10 is one way to gather the nanny’s name, address, and taxpayer identification number, though the IRS accepts any reasonable method.⁷ You’ll need the same details for Form 2441 at tax time.

Each claim needs a receipt or invoice showing five items:⁸

The dependent’s name.
Your nanny’s full legal name.
The specific dates of service (not the date you paid).
A description of the care, such as “in-home childcare.”
The amount paid for that period.

Some administrators accept the nanny’s signature on the claim form itself as certification. Credit card statements and canceled checks are not enough on their own because they lack service dates and type of care. Keep every signed receipt; missing documentation during an administrator audit means forfeited funds.

The Funding Rule That Surprises New Users

Unlike a health care FSA, a DCFSA doesn’t front-load your election. You can only be reimbursed up to the amount that has actually been deposited into the account so far.⁹ If you elected $7,500 spread across 24 pay periods, roughly $312 is available after your first paycheck. A $2,000 January nanny bill gets reimbursed in pieces as payroll deductions accumulate.

Payroll Taxes You Owe as a Household Employer

Paying a nanny through a DCFSA puts that nanny on the books. The FSA administrator reports distributions to the IRS, and the nanny’s reported income needs to match. Skipping the payroll piece can invite a notice and can undermine the exclusion itself.

Social Security and Medicare

Pay a household employee $3,000 or more in cash wages during 2026 and you must withhold and pay FICA taxes.¹⁰ The combined rate is 15.3%: you pay 7.65% and the nanny pays 7.65%. You may withhold the employee share from wages or cover it yourself. Under the $3,000 threshold, neither of you owes FICA on those wages.

Federal Unemployment Tax

Pay household employees a combined $1,000 or more in any calendar quarter and you owe FUTA on the first $7,000 of each employee’s annual wages.¹⁰ The gross rate is 6.0%, and a credit of up to 5.4% for state unemployment taxes paid usually brings the effective rate to 0.6%. You pay FUTA entirely from your own funds; you never withhold it from the nanny.

Form I-9

Federal law requires Form I-9 for any nanny providing regular, ongoing childcare in your home.¹¹ Sporadic or intermittent workers, and those employed through an agency, are excepted. Keep the completed form on file; you don’t submit it unless asked during an audit.

Estimated Payments

Because Schedule H taxes hit at filing time, many parents increase paycheck withholding or make estimated quarterly payments to avoid an underpayment penalty in April.¹²

The Use-It-or-Lose-It Rule

DCFSA funds don’t carry over. Anything left in your account at the end of the plan year and any grace period is forfeited.¹³ Estimate your nanny costs carefully during open enrollment. Contributing the $7,500 maximum and only spending $5,000 means losing $2,500.

Many employer plans offer a grace period of up to two and a half months after the plan year (typically through March 15) during which you can still incur eligible expenses against the prior year’s balance, with claims usually due by April 30.¹⁴ Not every plan includes one. There is no carryover option for DCFSAs the way there is for health care FSAs.

DCFSA or the Child and Dependent Care Credit

The Child and Dependent Care Tax Credit lets you claim a percentage of up to $3,000 in care expenses for one qualifying person or $6,000 for two or more. The two benefits don’t fully stack. Every dollar you exclude through a DCFSA reduces the expense limit available for the credit dollar-for-dollar.¹⁵

If you have two children and contribute the full $7,500 to a DCFSA, you’ve already exceeded the $6,000 credit expense limit, and the credit drops to zero. For many families in the 22% or 24% brackets, the DCFSA alone beats the credit because FSA contributions also avoid Social Security and Medicare taxes. For lower-income households eligible for the credit’s higher percentage rates (up to 50% of expenses for AGI under $15,000), the credit can be worth more. With one child and $8,000 in yearly nanny costs, you might contribute $3,000 to the DCFSA and claim the remaining eligible expenses under the credit. Run the numbers both ways before open enrollment.

What You File at Tax Time

Form 2441

Anyone who received dependent care benefits through an FSA files Form 2441 with Form 1040. Part III reconciles your FSA distributions against the exclusion limit; Part I lists your nanny’s name, address, and taxpayer identification number.¹⁶ Any amount above the exclusion gets added back to your taxable income. Incomplete or inaccurate provider information can cause the IRS to disallow the exclusion entirely.

Schedule H

If you paid your nanny $3,000 or more in 2026, you file Schedule H with your 1040 to report and pay Social Security, Medicare, and FUTA taxes.¹⁰ The total flows onto your 1040 and increases what you owe. Using a DCFSA while skipping Schedule H tells the IRS you paid a nanny while simultaneously not reporting employment taxes on those wages, which is the kind of mismatch that triggers a notice.

1
Office of the Law Revision Counsel. 26 USC 129 – Dependent Care Assistance Programs
2
Internal Revenue Service. 2025 Instructions for Form 2441 – Child and Dependent Care Expenses
3
Office of the Law Revision Counsel. 26 USC 21 – Expenses for Household and Dependent Care Services Necessary for Gainful Employment
4
FSAFEDS. FAQs – Qualifying Life Events
5
Internal Revenue Service. Publication 503 (2025), Child and Dependent Care Expenses
6
FSAFEDS. Dependent Care FSA Eligible Expenses
7
Internal Revenue Service. About Form W-10, Dependent Care Provider’s Identification and Certification
8
FSAFEDS. File a Claim – Dependent Care FSA
9
FSAFEDS. FAQs – DCFSA Reimbursement Limits
10
Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
11
U.S. Citizenship and Immigration Services (USCIS). Domestic Workers
12
Internal Revenue Service. About Schedule H (Form 1040), Household Employment Taxes
13
FSAFEDS. What Is the Use or Lose Rule? – FAQs
14
FSAFEDS. Dependent Care FSA – FAQs
15
Internal Revenue Service. Topic No. 602, Child and Dependent Care Credit
16
Internal Revenue Service. Instructions for Form 2441 (2025)