Paying a nanny legally costs real money — but the tax code gives working families ways to get a chunk of it back. The best one, if you have access to it, is a Dependent Care FSA (DCFSA): an account through your employer that lets you pay for childcare with pre-tax dollars. And for 2026, the amount you can run through it just got a lot bigger.

How a Dependent Care FSA works

A DCFSA is offered as a benefit through your (or your spouse's) job. You elect an annual amount, and that money is deducted from your paychecks before income and FICA taxes are calculated. You then get reimbursed from the account for qualifying childcare costs — including your nanny's wages — for a child under 13 so you can work.

Because the money never gets taxed, every dollar you route through a DCFSA saves you your combined income + FICA tax rate on that dollar — often 30% or more for many households.

The 2026 limit jumped to $7,500

For the first time since the 1980s, the DCFSA limit increased — from $5,000 to $7,500 per household for 2026 ($3,750 if married filing separately). That's a meaningful bump: if you can run the full $7,500 through pre-tax and your combined marginal rate is ~30%, that's roughly $2,250 back in a year.

The higher limit isn't automatic — each employer decides whether to adopt $7,500 or keep the old $5,000 cap. Check your benefits portal before assuming you can elect the full amount.

The rules to respect

  • Use it or lose it. DCFSA funds don't roll over — unspent money at year-end is forfeited, so only elect what you'll actually spend.
  • It reimburses as it accrues. Unlike a health FSA, you can only draw out what's been deducted so far, not the whole year up front.
  • The care must let you work. It's for childcare that enables you (and a spouse) to be employed or look for work.
  • On-the-books only. You'll report your nanny's name, address, and SSN or EIN — so this requires paying legally with a W-2.

FSA vs. the childcare tax credit

There's also the Child & Dependent Care Tax Credit, and you can use both — but dollars run through the FSA reduce the expenses you can claim for the credit. For most middle- and upper-income families, maxing the FSA first saves more, then applying any remaining expenses to the credit. Families with two or more kids can often benefit from both.

With two kids, you could shelter up to $7,500 in the FSA and still apply additional wages toward the credit — stacking two tax breaks on the same nanny.

Employer doesn't offer a Dependent Care FSA yet? It costs them almost nothing and every major payroll provider supports it. Download a one-page brief to hand your HR team.

Download the HR handout (PDF)

Not sure whether the FSA or the tax credit saves you more? Compare both side by side with your own numbers.

Open the FSA vs. credit calculator

House produces the W-2 and wage records your FSA administrator needs to reimburse you — free.

Get W-2-ready records
This is general information, not tax advice. Plan rules and limits vary — confirm details with your benefits administrator and check current IRS guidance.

The bottom line

If your employer offers a Dependent Care FSA, use it — now up to $7,500 for 2026. It's the simplest way to pay part of your nanny's wages tax-free, and for many families it's worth well over a thousand dollars a year. Just watch the 'use it or lose it' rule and pay your nanny on the books.