How Do I Pay for Child Care?

While child care isn’t cheap, there are a few ways to minimize the cost. They can include flexible spending accounts, tax breaks, trading your skills, and turning to local resources.

Flexible spending accounts
Many employers offer flexible spending accounts (called a Section 125 or cafeteria plan), which allow you to pay for child care with pre-tax dollars. This can be like getting a 15 percent—or larger—discount on these expenses. Here's how it works: Through a pre-tax payroll deduction, you set aside money into this account and then draw on the account to pay for child care. You decide how much to have deducted from your paycheck and put into the account. When you send a child care receipt to the company that manages the plan, you get reimbursed for that cost out of your account.

Just be aware that if you don't use all of the money you have contributed to the plan, you lose it. In addition, you will have to pay for day care out of a smaller paycheck, and then wait for reimbursement. If you are in the 15 percent tax bracket, the tax credit may save you more money. The IRS will not let you take the tax credit for child care paid for through a flexible spending account.

Tax breaks
Most working parents are eligible for a tax credit that repays a portion of the costs of child care. In general, if your child is 12 years old or younger and you're working (or looking for work) you'll qualify for the credit. A tax credit is the best type of tax break, because it reduces your tax liability dollar for dollar. For more information, visit the IRS Web site or call the IRS form distribution center at 1-800-829-3676. Download or ask for IRS Form 2441, Child and Dependent Care Expenses.

Trading your skills
Some caregivers will accept services in exchange for watching your child, especially if you work in a skilled trade. For example, if you're an electrician, perhaps your child’s caregiver needs some electrical work done. Or, perhaps the caregiver needs some painting, laundry, or car maintenance done. You never know what kind of help a caregiver may need until you ask.

Local resources
Local government agencies and civic organizations may offer assistance. A good place to start exploring these options is Child Care Aware at 1-800-424-2246. This group can put you in touch with your state's referral agency and suggest local resources to help pay for child care.

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