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FSA or tax credit? See which saves more.

A Dependent Care FSA and the Child & Dependent Care Credit both cut the cost of a nanny — but you can't use both on the same dollars. Compare them side by side with 2026 numbers. No sign-up, nothing leaves your browser.

$/yr
Nanny gross wages count as care expenses.
Or dependents unable to care for themselves.
$/yr
Sets your tax bracket and credit rate.
%
No state income tax on wages.
$7,500
Most families with a nanny simply max this out.
Your bottom lineThe FSA route wins by about $1,174/year.You can't use both tax breaks on the same dollars — pick the bigger number below (or split, if the FSA doesn't use up the credit's cap).
Dependent Care FSA
Pay pre-tax through your employer
Sheltered pre-tax$7,500
Federal income tax saved (22%)+$1,650.00
FICA saved (7.65%)+$573.75
You save$2,224

Back in your pocket every year.

Child & Dependent Care Credit
Claim it on your tax return (Form 2441)
Eligible expenses$3,000
Expense cap (1 child)$3,000
Your credit rate35%
You save$1,050

A dollar-for-dollar cut in your tax bill.

A Dependent Care FSA is employer-sponsored— you can only sign up through your (or your spouse's) workplace benefits, during open enrollment or after a qualifying life event like a new child or nanny. See how to set one up
Your employer doesn't offer one yet? It costs them almost nothing — often it saves them money — and every major payroll provider already supports it. Hand HR this one-page brief.
Download the HR handout (PDF)
Paying your nanny on the books is what unlocks both of these. House handles the W-2 payroll that makes you eligible — free.
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Estimate only, not tax advice. Uses 2026 figures: a $7,500 Dependent Care FSA cap, the enhanced 50%→20% credit-rate schedule, and inflation-adjusted federal brackets — all of which can change. FICA savings assume the sheltered wages fall below the Social Security wage base. A few states (e.g. New Jersey, Pennsylvania) don't exclude FSA contributions from state wages. Confirm your plan's cap and current IRS guidance before relying on any number here.

How each one works.

  • Dependent Care FSA — a pre-tax salary reduction through your employer. Sheltered wages skip federal income tax, your 7.65% FICA, and (in most states) state income tax, up to a $7,500 household cap in 2026.
  • Child & Dependent Care Credit — a credit worth 20%–50% of up to $3,000 of expenses for one child or $6,000 for two or more, claimed on IRS Form 2441. The rate falls as income rises.
  • Both require legal pay— you report your nanny's taxpayer ID and pay them as a W-2 employee. Read the full FSA guide

FSA vs. tax credit FAQ.

How much can a Dependent Care FSA save me on a nanny?

A Dependent Care FSA lets you pay childcare with pre-tax dollars, so you save your federal income-tax rate plus 7.65% FICA (and state income tax in most states) on whatever you route through it — up to the 2026 household cap of $7,500. For a family in the 24% bracket that's roughly $2,400 a year. Enter your own numbers above to see your figure.

Can I use both the FSA and the tax credit?

Not on the same dollars. Money you run through a Dependent Care FSA reduces the Child & Dependent Care Credit's expense cap ($3,000 for one child, $6,000 for two or more) dollar-for-dollar. If your FSA is smaller than that cap you can claim the credit on the leftover expenses — the calculator adds that residual in automatically.

Which is better — the FSA or the credit?

For most families who pay enough tax, the FSA wins because it also saves FICA and, in most states, state income tax, while the credit rate falls to 20% for higher earners. Lower-income households can come out ahead with the credit, whose rate reaches 50% in 2026. The calculator shows both totals so you can compare your own case.

How do I set up a Dependent Care FSA?

It's an employer benefit — you can only enroll through your (or your spouse's) workplace, during open enrollment or after a qualifying life event such as a new baby or a new nanny arrangement. You elect an annual amount, it's deducted pre-tax from your paychecks, and you reimburse yourself as you pay for care. It's use-it-or-lose-it, so don't elect more than you'll spend.

Does paying a nanny under the table qualify?

No. To use a Dependent Care FSA or claim the credit you must report the care provider's name, address, and taxpayer ID and pay them legally. Paying a nanny on the books as a W-2 household employee is what makes you eligible for these tax breaks in the first place.

Pay your nanny right, unlock the savings.

House runs W-2 nanny payroll — the on-the-books pay that makes you eligible for the FSA and the credit — free.

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