Self-employed parents paying for childcare so they can work have two very different tax tools available, and picking the wrong one — or not realizing you have to choose — can cost hundreds of dollars a year.
How the Child and Dependent Care Credit Works
This credit reimburses a percentage of qualifying childcare expenses paid so you (and a spouse, if filing jointly) can work or look for work, up to a capped amount of expenses per child. It applies to care for children under 13, or for a spouse or dependent who is physically or mentally unable to care for themselves. Because it's a credit, not a deduction, it reduces your tax bill directly rather than just your taxable income.
How a Dependent Care FSA Works — and Why It's Different for the Self-Employed
A Dependent Care Flexible Spending Account lets you set aside pre-tax dollars, deducted before payroll taxes, to pay for the same kind of qualifying care. The catch: an FSA is an employer-sponsored benefit. A sole proprietor with no employees generally cannot open one for themselves, though an S-corp owner who pays themselves a W-2 salary through their own corporation may be able to set one up as a company benefit.
You Generally Cannot Double-Dip
If you use a Dependent Care FSA, the same expenses you ran through the FSA cannot also be counted toward the Child and Dependent Care Credit — the expense cap for the credit is reduced by whatever you already excluded through the FSA. Freelancers structured as an S-corp with both options available need to run the actual numbers rather than assuming the FSA automatically wins.
Why the FSA Often Wins for Higher Earners
Because FSA contributions bypass both income tax and self-employment/payroll tax, a self-employed person in a higher tax bracket who can access one through an S-corp structure often comes out ahead versus claiming the credit alone, since the credit's percentage drops as income rises. Lower-income sole proprietors without FSA access simply take the credit — it's their only option, and it's still meaningful.
Documentation the IRS Requires
For either benefit, you need the care provider's name, address, and taxpayer identification number (or Social Security number for an individual). Without this identifying information on your return, the IRS can deny the credit outright, even if the expense itself was entirely legitimate.
Frequently asked questions
Does babysitting by a relative qualify for the credit?
It can, as long as the relative isn't your spouse, the child's parent, or a dependent you claim, and you report the payments and their identifying information as required.
Is summer day camp a qualifying expense?
Yes, day camp qualifies, but overnight camp does not — the IRS explicitly excludes overnight camp costs from both the credit and FSA reimbursement.
What's the maximum amount of expenses that can count toward the credit?
There's a per-child/dependent expense cap and an overall household cap that applies regardless of how many qualifying dependents you have, and the percentage reimbursed decreases as income rises.