Up to a 95% tax break for employer provided child care
For those of you with small businesses out there, opportunity exists for an up to 95% tax savings for providing child care for your employees. The tax savings involves the following items: federal employer child care credit, California employer child care credit, federal income tax deduction, California income tax deduction, FICA savings.
The maximum credit can be obtained by paying up to $100 per month, per child in qualifying child care payments. Payments must be made directly by the employer to the qualifying child care provider. Care must be provided under the authority of a license when required by California law.
For example, assume you establish a qualified care plan to provide child care assistance for one of your employees with four children. Total payments for the year to the child care provider would be $4,800 and the tax savings would work as follows:
- Federal credit – $4,800 x 25% = $1,200
- Federal tax deduction – ($4,800 – $,1200 credit) x 35% tax rate = $1,260
- FICA payroll tax savings – $4,800 x 7.65% = $368
- California credit – $4,800 x 30% = $1,440
- California tax deduction – ($,4800 – $1,440 credit) x 9.55% tax rate = $321
- Total tax savings – $1,200 + $1,260 + $368 + $1,440 + $321 = $4,589
- Employer cash payments – $4,800
- Net out of pocket cost to employer – $4,800 – $4,589 = $211!!!
The payments made by the employer on behalf of the employee are excluded from the employee’s income, so it is a win-win situation. Furthermore a plan such as this may be used as part of negotiating salary increases or compensation plans with your employees!
Please contact Matt Wheeler at LMGW or your LMGW advisor for more information.
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