By Rhonda Abrams
Gannett News Service
Boy, do I feel foolish. It turns out that there's a fringe benefit I could have been giving my employees that would have saved all of us money. It costs virtually nothing and is easy to implement. It's the "dependent care assistance program," or DCAP.
The DCAP allows employees with children under age 13 to pay up to $5,000 in child-care expenses with "pretax" rather than "post-tax" dollars. And you, as their employer, get a benefit as well - you don't have to pay payroll taxes on that $5,000.
Paying with pretax dollars gives your employee an immediate financial gain. It lowers their adjusted gross income and their taxes.
This is actually a very easy program to implement. There are at least three ways to deal with child-care expenses, and the IRS often uses the same terms for each:
Dependent care assistance program: a simple plan, enabling employees to pay up to $5,000 in child care with pretax dollars
Dependent care tax credit: a tax credit, not deduction, available to lower-income employees
"Cafeteria" or flexible spending plan: a broad-based plan, allowing employees to pay many fringe expenses (including not reimbursed health care) from pretax dollars.
DACP easiest program
The least complicated of the three is the DCAP, which you can adopt with a simple written plan. You don't have to file the plan with the IRS or any place else.
"It's relatively straightforward, nothing that's exotic," explained Martin Nissenbaum, national director of personal income tax planning at Ernst & Young, New York. "Any lawyer could find a sample plan."
The requirements are simple, too, he said: "You have to provide notice of availability, it can't be discriminatory, and you may have to see whether the benefits apply in your situation."
Operating the plan is quite simple. "The plan could provide for payment directly to the child-care provider," said Nissenbaum. "Or more typically, the employee pays for child care, and the employer reimburses the employee." At the end of the year, you have to indicate the amount of child-care benefits provided on box 10 of the employee's W-2.
Nissenbaum is quick to remind employers to consult their own attorney or accountant to help them adopt a Dependent Care Assistance Program.
IRS has details
The details are covered in IRS Publication 15-B. Here's some of the fine print:
You need a written plan. The plan has to be adopted before the benefits can be taken. The plan has to be available to everyone The plan can not favor employeeswith 5 percent or more ownership of the company or more than $90,000 in income.
The amount excluded from income can't be more than the earned income of either the employee or the employee's spouse. The maximum amount allowed is $5,000 ($2,500 for married employees filing separate returns) and cannot be more than the actual expenses.
Rhonda Abrams is the author of "The Successful Business Plan: Secrets & Strategies" and "The Successful Business Organizer." Register to receive Rhonda's free business tips newsletter at www.RhondaOnline.com.
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