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Child care payments may be provided to an employee as a non taxable fringe benefit, if they are part of a non-discriminatory plan. The IRS rules on what determines a plan to be non discriminatory are lengthy, but basically what this means is that the plan must not be available only to highly compensated employees.
Also not more than 25 percent of the amounts paid or incurred by the employer for dependent care assistance during the year may be provided for the class of individuals who are shareholders or owners (or their spouses or dependents), each of whom (on any day of the year) owns more than 5 percent of the stock or of the capital or profits interest in the employer.
The maximum amount that can be given to any one employee without it being a taxable benefit is $5,000 annually. Any excess payments are taxable.
I am giving you a link to IRC Code Section 129 which outlines in detail the rules for this type of fringe benefit. Refer in particular to paragraph d (Dependent care Assistance Program).
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Thank You for the information, however I am aware of the elidgebility guidlines. What I need to know is what are the procedures associated with paying out this benefit. Do I have to have a 125 plan? Or can I pay the daycare directly without referencing the benefit on the employees paystub? What I am really looking for is what type of documentation is it going to take to do this.
By the way I really want to take care of this and will be more than happy to pay you I just need to know these things.
Thank You for all of your help
Hello again MrJames,
First, you do not need to have these payments administered under a 125 plan, although that is certainly an option if you choose to do so.
However, if you choose to just directly provide the employee with dependent care assistance, then you may make the payments either directly to the care provider or to the employee - that is your choice. However, as stated above, the amount which can be excluded from taxable wages cannot exceed $5,000 annually.
In addition, you asked about referencing the amount on the employee's paystub. While you would not have to do that, you would have to report the amount paid to the employee or to the care provider on the employee's W-2 form. The amount which is non-taxable (up to $5,000) is reported in Box 10 of the employee's W-2 form. Any amounts which exceed the $5,000 limit are reported in boxes 1, 3 and 5 as taxable wages. Any employee who has amounts reported in box 10 of his W-2 form must then fill out Form 2441 for Child and Dependent Care Expenses, and would report receiving this assistance. This is to assure that the employee does not receive in effect a double deduction for such expenses.
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Thank you so much for your help! You would not believe the weight that has been lifted off my shoulders. I have been searching all night for this information and its nice to have someone like yourself and with your experience to be available to help out small business owners like myself"
I would like to talk to you a little more about some things please let me know the best way of getting a hold of you. My email address is [email protected]
Thanks again for all of your help.
Unfortunately under the rules of this website, we are not allowed to give customers our personal email address or phone #, so I would be in violation of the website rules by doing so, And when you provide me with an email or phone #, it shows as all XXXXXX's, so it is blocked from viewing.
However, if you have future questions that you would like for me to help with, when you post your questions on JA you have the option of requesting a specific expert to answer the question. As long as I am in the forum (which I normally am most evenings), then I will be happy to assist you if I can.