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Chapter 33. Child and Dependent Care Credit Extra credit for child born in 1992. If you claim the part of the earned income credit that is an extra credit for a child born in 1992, you cannot claim the credit for child and dependent care expenses for care of that child. If you are eligible to claim both credits for the same child, you must choose only one. Choose the credit that will give you the lowest tax or the largest refund. If you don't owe any tax and did not receive any employer-provided dependent care benefits, claim the extra credit for child born in 1992 to get the largest refund. If you choose the extra credit for child born in 1992, you can still claim the child and dependent care credit for your other qualifying children. If you need more information about the extra credit for a child born in 1992, see Chapter 35. Important Reminder You may have to pay employment taxes. If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer who has to pay employment taxes. Usually, you are not a household employer if the person who cares for your child or dependent does so at his or her home or place of business. See Employment Taxes for Household Employers, later, for a discussion of employment taxes and what forms you must file if you are a household employer. For more information, see Publication 926, Employment Taxes for Household Employers. Introduction This chapter discusses the credit for child and dependent care expenses and covers the following topics: ∙ Tests you must meet to claim the credit ∙ How to figure the credit ∙ How to claim the credit ∙ Employment taxes you may have to pay as a household employer To qualify for the credit, you must pay someone to care for your dependent under age 13 or your disabled spouse or dependent. You must pay these expenses so you can work or look for work. You must also meet certain other tests, which are explained in this chapter. Related publications and forms. This chapter refers to several publications and forms that you may need. The list of forms does not include Forms 1040, 1040A, and 1040EZ. For more information, you may want to order the following: Publication 503, Child and Dependent Care Expenses Publication 926, Employment Taxes for Household Employers Form W─10, Dependent Care Provider's Identification and Certification Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return Form 942, Employer's Quarterly Tax Return for Household Employees Schedule 2 (Form 1040A), Child and Dependent Care Expenses for Form 1040A Filers Form 2441, Child and Dependent Care Expenses Form 6251, Alternative Minimum Tax - Individuals Tests to Claim the Credit To claim the credit, you must meet all the following tests. These tests are also presented in the chart Can You Claim the Credit? and are explained in detail in this chapter. 1) The care must be for one or more qualifying persons. For information about who is a qualifying person, see Qualifying Person Test, later. 2) You (and your spouse if you are married) must keep up a home that you live in with the qualifying person or persons. (See Keeping Up a Home Test, later.) 3) You (and your spouse if you are married) must have earned income during the year. (However, under Earned Income Test, later, see Rule for a student-spouse or spouse not capable of self-care.) 4) You must pay child and dependent care expenses so you (and your spouse if you are married) can work or look for work. (See Work-Related Expense Test later, for more information.) 5) You must file a joint return if you are married, unless the exceptions discussed later under Joint Return Test apply to you. 6) You must identify the care provider on your tax return. (See Provider Identification Test, later.) 7) You must make payments for child and dependent care to someone you (or your spouse) cannot claim as a dependent. If you make payments to your child, he or she cannot be your dependent and must be age 19 or older by the end of the year for the payments to qualify. (See Special Rules, later.) 8) You cannot exclude from your income $2,400 or more of employer-provided dependent care assistance ($4,800 or more if two or more persons were cared for). See Reduced Dollar Limit, later. 9) You must file Form 1040 or Form 1040A, not Form 1040EZ. Qualifying Person Test Your child and dependent care expenses must be for the care of one or more members of your home who are qualifying persons. A qualifying person is: 1) Your dependent who was under 13 when the care was provided and for whom you can claim an exemption (also see Extra credit for child born in 1992 and Child of Divorced or Separated Parents, later), 2) Your spouse who was physically or mentally not able to care for himself or herself, or 3) Any person who was not able to care for himself or herself and for whom you can claim an exemption (or could claim an exemption except the person had $2,300 or more of gross income). Physically or mentally not able to care for oneself. Persons who are not able to dress, clean, or feed themselves because of physical or mental problems are considered not capable of self-care. Also, persons who require constant attention to prevent them from injuring themselves or others are considered not capable of self-care. Person qualifying for part of year. You determine a person's qualifying status each day. For example, if the person you pay child and dependent care expenses for no longer qualifies on September 16, count only those expenses through September 15. Also see Dollar Limit, later. Extra credit for child born in 1992. If you claim the part of the earned income credit that is an extra credit for a child born in 1992, you cannot claim the credit for child and dependent care expenses for care of that child. That child is not a qualifying person for purposes of the child and dependent care credit. If you claim the extra credit for child born in 1992, you can still claim the child and dependent care credit for your other qualifying children. If you need more information about the extra credit for a child born in 1992, see Chapter 35. Child of Divorced or Separated Parents If you are divorced or separated (defined later), your child is a qualifying person if you are the custodial parent and your child: 1) Was under age 13, or was not capable of self-care, when the care was provided, 2) Was in the custody of one or both parents for more than half of the year, 3) Received more than half of his or her support for the year from one or both parents, and 4) Is not a child for whom you claim the extra credit for child born in 1992 (part of the earned income credit). Custodial parent. You are the custodial parent if, during the year, you have custody of your child longer than your child's other parent has custody. Exemption test. You generally must claim an exemption for a child under the age of 13. However, you can treat the child as a qualifying person if you meet all the other requirements but do not claim the exemption because: 1) The noncustodial parent claims the exemption because you signed Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents, or a similar statement, or 2) The noncustodial parent provides at least $600 for the support of the child and claims the exemption under a qualified pre-1985 decree of divorce or separate maintenance, or a written separation agreement. If you can take the credit because of this exception, write your child's name in the space to the left of line 3, Form 2441 or Schedule 2 (Form 1040A). The noncustodial parent cannot treat the child as a qualifying person, even if that parent can claim an exemption for the child. Example. You are divorced and have custody of your 8-year-old child. You sign Form 8332 to allow your ex-spouse to take the exemption. You pay child care expenses so you can work. Your child is a qualifying person and you, the custodial parent, can claim the credit for those expenses, even though your ex-spouse claims an exemption for the child. Divorced or separated. For purposes of determining whether your child is a qualifying person, you are considered divorced or separated if either of the following apply. 1) You are divorced or separated under a decree of divorce or separate maintenance or a written separation agreement, or 2) You lived apart from your spouse for all of the last 6 months of the year. Keeping Up a Home Test To claim the credit, you (and your spouse if you are married) must keep up a home that you live in with one or more qualifying persons. You are keeping up a home if you pay more than half the cost of running it. Home. The term "home" means the main home for both you and the qualifying person. Your home can be the main home even if the qualifying person does not live there all year because of his or her: Birth, Death, or Temporary absence due to: a) Sickness, b) School, c) Business, d) Vacation, e) Military service, or f) Custody agreement. Costs of keeping up home. The costs of keeping up a home normally include property taxes, mortgage interest, rent, utility charges, home repairs, insurance on the home, and food eaten at home. The costs of keeping up a home do not include payments for clothing, education, medical treatment, vacations, life insurance, transportation, and mortgage principal. They also do not include the purchase, permanent improvement, or replacement of property. For example, the cost of replacing a water heater is not considered upkeep, but the cost of repairing a water heater can be included. Earned Income Test To claim the credit, you (and your spouse if you are married) must have earned income during the year. Earned income includes wages, salaries, tips, other employee compensation, and net earnings from self-employment. Earned income also includes strike benefits and any disability pay you report as wages (see Chapter 11). Income exempt from self-employment tax as a result of the filing and approval of Form 4361 (generally relating to the clergy) is earned income if it is wages, salaries, tips, or other employee compensation. This includes a housing allowance or the rental value of a parsonage that you get as part of your pay for services as an employee. Income exempt from self-employment tax as a result of the filing and approval of Form 4029 (relating to members of certain religious faiths) is not earned income. Wages, salaries, tips or other employee compensation that is exempt from social security tax as a result of filing Form 4029 is earned income. Earned income does not include pensions or annuities, social security payments, workers' compensation, interest, dividends, or unemployment compensation. Rule for a student-spouse or spouse not capable of self-care. Your spouse is treated as having earned income for any month that he or she is: 1) A full-time student, or 2) Physically or mentally not capable of self-care. Figure the earned income of the nonworking spouse as shown under Earned Income Limit, later. This rule applies to only one spouse for any one month. If, in the same month, both you and your spouse do not work and are either full-time students or physically or mentally not capable of self-care, neither of you can be treated as having earned income in that month. Full-time student. You are a full-time student if you are enrolled at and attend a school for the number of hours or classes that the school considers full time. You must have been a student for at least some part of 5 calendar months during the year. (The months need not be consecutive.) If you attend school only at night, you are not a full-time student. However, you can attend some night classes. The term "school" includes elementary schools, junior and senior high schools, colleges, universities, and technical, trade, and mechanical schools. It does not include on-the-job training courses, correspondence schools, and night schools. Work-Related Expense Test Child and dependent care expenses must be work related to qualify for the credit. Expenses are considered work related only if: ∙ They allow you (and your spouse if you are married) to work or look for work, and ∙ They are for a qualifying person's care. Working or Looking for Work To be work related, your expenses must be to allow you to work or look for work. If you are married, generally both you and your spouse must work or look for work. See Rule for a student-spouse or spouse not capable of self-care, earlier. Whether your expenses allow you to work or look for work depends on the facts. For example, the cost of a babysitter while you and your spouse go out to eat normally is not a work-related expense. Also, expenses are not considered work related merely because you had them while you were working. Your work can be for others or in your own business or partnership. It can be either full time or part time. Work also includes actively looking for work. However, if you do not find a job and have no earned income for the year, you cannot take this credit. Also see Earned Income Limit, later. Unpaid volunteer work or volunteer work for a nominal salary does not qualify. Work test met for part of year. If you work, or actively look for work, during only part of the period covered by the expenses, then you must figure your expenses for each day. For example, if you work all year and pay care expenses of $120 a month ($1,440 for the year), all the expenses are work related. However, if you work or look for work for only 2 months and 15 days during the year and pay expenses of $120 a month, your work-related expenses are limited to $300 (2-1/2 months * $120). Payments while you are out sick. Do not count as work-related expenses amounts you pay for child and dependent care while you are off from work because of illness. These amounts are not paid to allow you to work. This applies even if you get sick pay and are still considered an employee. Care of a Qualifying Person To be work related, your expenses must be to provide care for a qualifying person. You do not have to choose the least expensive way of providing the care. Expenses for household services qualify if part of the services are for the care of qualifying persons. For details, see Household Services, later. The main reason to have expenses for the care of a qualifying person must be for the person's well-being and protection. These expenses do not include amounts you pay for food, clothing, schooling, and entertainment. However, if these amounts are incident to and cannot be separated from the cost of caring for the qualifying person, you can count the total cost. For example, if a nursery school or day-care center provides lunch and educational activities as a part of its preschool child care service, you can count the total cost. Schooling. Do not count the cost of schooling in the first grade or higher. You must divide the total cost between the cost of caring for the child and the cost of schooling. Example. You place your 10-year-old child in a boarding school so you can work full time. Only the part of the boarding school expense that is for the care of your child is a work-related expense. You cannot count any part of the amount you pay the school for your child's education. Care outside your home. You can count the cost of care provided outside your home if the care is for your dependent under age 13, or any other qualifying person who regularly spends at least 8 hours each day in your household. Care that is provided outside your home by a dependent care center can be counted if the center complies with all applicable state and local regulations. Dependent care center. A dependent care center is a place that provides care for more than six persons (other than persons who live there) and receives a fee, payment, or grant for providing services for any of those persons, even if the center is not run for profit. The cost of sending your child to an overnight camp is not considered a work- related expense. Transportation. The cost of getting a qualifying person from your home to the care location and back, or from the care location to school and back, is not considered a work-related expense. This includes the costs of bus, subway, taxi, or private car. Also, if you pay the transportation cost for the care provider to come to your home, you cannot count this cost as a work-related expense. Household Services Expenses you pay for household services meet the work-related expense test if they are at least partly for the well-being and protection of a qualifying person. Household services are ordinary and usual services done in and around your home that are necessary to run your home. They include the services of a housekeeper, maid, or cook. However, they do not include the services of a chauffeur, bartender, or gardener. Expenses partly work related. If part of an expense is work related (for either household services or the care of a qualifying person) and part is for other purposes, you have to divide the expense. To figure your credit, count only the part that is work related. However, you do not have to divide the expense if only a small part is for the other purposes. Example. You pay a housekeeper to care for your 9-year-old and 15-year-old children so you can work. The housekeeper spends most of the time doing normal household work and spends 30 minutes a day driving you to and from work. The entire expense of the housekeeper is a work-related expense. You do not have to deduct any amount for being driven to and from work because the time involved is minimal. You do not have to deduct any amount for the care of the 15-year-old child (not a qualifying person) because the household expense is partly for the care of the 9-year-old child, who is a qualifying person. Meals and lodging provided for housekeeper. If you have expenses for food that your housekeeper eats in your home, count these as work-related expenses. If you have extra expenses for your housekeeper's lodging, count these as work-related expenses. For example, if you moved to an apartment with an extra bedroom for the housekeeper, count the extra rent and utility expenses for this bedroom as work-related expenses. Or, if your housekeeper moves into an existing bedroom in your home, count the extra utility expenses you may have as work-related expenses. Do not include the value of meals provided for your own convenience as wages on the Form W─2, Wage and Tax Statement, you give your housekeeper. Do not include the value of lodging if you provide it for your convenience and require the housekeeper to live in your home. Taxes paid on wages. If you pay wages for household help, you may have to pay the employer's portion and withhold the employee's portion of the social security and Medicare taxes. You may also have to pay federal unemployment tax (FUTA) and similar state taxes. See Employment Taxes for Household Employers, later. The taxes you pay on wages for qualifying child and dependent care services are work-related expenses. Medical Expenses Some expenses for the care of a qualifying person who is not capable of self-care may qualify as work-related expenses and also as medical expenses. You can use them either way, but you cannot use the same expenses to claim both a credit and a medical expense deduction. If you use these expenses to figure the credit and they are more than the earned income limit or the dollar limit, discussed later, you can add the excess to your medical expenses. However, if you use your total cost to figure your medical expense deduction, you cannot use any part of them to figure your credit. Note. Any amount that is excluded from your income under your employer's dependent care assistance plan cannot be used to claim a medical expense deduction. Special Rules Special rules apply to payments to certain relatives, expenses that are reimbursed, and expenses that are paid in a later or earlier year. Payments to relatives. You can count work-related payments you pay to relatives who are not your dependents, even if they live in your home. However, do not count any amounts you pay to: 1) A dependent for whom you (or your spouse if you are married) can claim an exemption, or 2) Your child who was under the age of 19 at the end of the year, even if he or she is not your dependent. Expenses reimbursed. If a state social services agency pays you a nontaxable amount to reimburse you for some of your child and dependent care expenses, you cannot count the expenses that are reimbursed as work-related expenses. For example, you paid work-related expenses of $3,000. If you are reimbursed $2,000 by a state social services agency, you figure your credit on $1,000. Expenses not paid until the following year. You can count only the expenses that you pay during the year you are taking the credit. In other words, if you had expenses in 1991 that you did not pay until 1992, you cannot count them when figuring your credit for 1991. However, you may be able to claim a credit for all or part of them on your 1992 tax return. You must file Form 1040, not Form 1040A, to claim a credit for expenses you had in the preceding year. See Publication 503 for an example. Expenses prepaid in an earlier year. If you pay for services before they are provided, you can count the prepaid expenses only in the year the care is received. Fill out your Form 2441 or Schedule 2 (Form 1040A) for the later year as if the prepaid expense was actually paid in the later year. Joint Return Test Generally, married couples must file a joint return to take the credit. However, if you are legally separated or living apart from your spouse, you may be able to file a separate return and still take the credit. Married couple. If you are married at the end of your tax year, you must file a joint return with your spouse to take the credit. Legally separated. You are not considered married if you are legally separated from your spouse under a decree of divorce or separate maintenance. You are eligible to take the credit on a separate return. Married and living apart. You are not considered married and are eligible to take the credit if all the following apply: 1) You file a separate return. 2) Your home is the home of a qualifying person for more than half the year. 3) You pay more than half the cost of keeping up your home for the year. 4) Your spouse does not live in your home for the last 6 months of the year. Provider Identification Test You must identify all persons or organizations that provide care for your child or dependent. Do this on the same form you use to claim the credit. If you file Form 1040, use Part I of Form 2441, Child and Dependent Care Expenses, to report the required information. If you file Form 1040A, use Part I of Schedule 2. Information required. To identify the care provider, you must give the provider's: 1) Name, 2) Address, and 3) Taxpayer identification number. If the care provider is an individual, the taxpayer identification number is often the social security number. If the care provider is an organization, then it is the employer identification number (EIN). The taxpayer identification number is not required if the care provider is one of certain tax-exempt organizations (such as a church or school). In this case write "Tax-Exempt" in the space where the tax form calls for the number. If you cannot provide all of the information required, or if the information is incorrect, you must be able to show that you used due diligence (discussed later) in trying to furnish the required information. Getting the information. You can use Form W─10, Dependent Care Provider's Identification and Certification, to request the required information from the care provider. If you do not use Form W─10, you can get the required information from any of the following: 1) A copy of the provider's social security card, 2) A copy of the provider's driver's license (in a state where the license includes the social security number), 3) A copy of the provider's completed Form W─4 if he or she is your household employee, 4) A copy of the statement furnished by your employer if the provider is your employer's dependent care assistance program, or 5) A letter or invoice from the provider if it shows the required information. You should keep the required information about the care provider with your tax records. Do not send Form W─10 (or other document if Form W─10 is not used) to the Internal Revenue Service. Due diligence. If the care provider information you give is incorrect or incomplete, your credit may not be allowed. However, if you can show that you used due diligence in trying to supply the required information, you can still claim the credit. You can show due diligence by getting and keeping the provider's completed Form W─10 or one of the other sources of information listed above. Care providers can be penalized if they do not provide this information to you or if they provide incorrect information. Provider refusal. If the provider refuses to give you the required information, you should report whatever information you have (such as the name and address) on the form you use to claim the credit. Write "See page 2" in the columns calling for the information you do not have. On the bottom of page 2, explain that you requested the information from the care provider, but the provider did not give you the information. This statement will show that you used due diligence in trying to furnish the required information. How to Figure the Credit Your credit is a percentage of your work-related expenses. First, you must figure both the earned income limit and the dollar limit on those expenses. Then, depending on how much adjusted gross income you have, you figure the applicable percentage for the credit. Earned Income Limit The amount of work-related expenses you use to figure your credit cannot be more than: 1) Your earned income for the year, if you are single at the end of the year, or 2) The smaller of your earned income or your spouse's earned income for the year, if you are married at the end of the year. If you remarried during the year, use only the earned income of the spouse you are married to at the end of the year. Use that spouse's earned income for the entire year, even though you were married for only part of the year. Earned income. Earned income is defined under Earned Income Test, earlier. Community property laws. You should disregard community property laws when you figure your earned income for this credit. Self-employment. If you are self-employed, you must include your net earnings in earned income. For purposes of the child and dependent care credit, net earnings from self-employment means the amount from line 3 of Schedule SE minus any deduction on line 25 of Form 1040 plus any self-employment earnings not reported on Schedule SE because they are less than $400. Subtract any business losses from your earned income. If you filed Schedule C to report income as a statutory employee, also include as earned income the amount from line 1 of that Schedule C. Optional method. You may be able to figure your net earnings from your business by the optional method, instead of the regular method. If you can use the optional method to figure self-employment tax, you may be able to increase your earned income for this credit. Get Publication 533, Self-Employment Tax, for details. In this case, subtract any deduction you claimed on Form 1040, line 25, from the total of the amounts on Schedule SE, Section B, lines 3 and 4b, to figure earned income. Student-spouse or spouse not capable of self-care. As discussed earlier under Earned Income Test, a spouse who is either a full-time student or not capable of self-care is treated as having earned income. The earned income of such a spouse for each month is considered to be $200 if there is one qualifying person in your home, or $400 if there are two or more. However, if your spouse does work during that month, use the higher of $200 (or $400) or his or her actual earned income for that month. If your spouse is a full-time student (or not capable of self-care) for only part of a month, the full $200 (or $400) still applies. Only one spouse can be considered to have this earned income of $200, or $400, for any one month. If, in the same month, both you and your spouse do not work and are either full-time students or not capable of self-care, you cannot use any amount you pay that month to figure the credit, even if you are looking for work. Surviving spouse. If your spouse died during 1992 and you file a joint return as a surviving spouse, you are not considered married for purposes of the earned income limit. Use only your income in figuring the earned income limit. Dollar Limit There is a dollar limit on the amount of your work-related expenses you can use to figure the credit. This limit is $2,400 for one qualifying person, or $4,800 for two or more qualifying persons. Yearly limit. The dollar limit is a yearly limit. The amount of the limit remains the same no matter how long you have a qualifying person in your household. In other words, use the $4,800 limit if you had more than one qualifying person at any time during the year. Person qualifying for part of year. When you figure your total work-related expenses for the year, count only the ones you had for a qualifying person during the time the person qualified. For example, your son is your only qualifying person. If he turns 13 in 1992, you can count only the expenses you had before your son's thirteenth birthday. If you had expenses of less than $2,400 during the time your son qualified, count only the smaller amount. Reduced Dollar Limit Your employer may provide you with child and dependent care benefits. The dollar limit is reduced by these benefits when you figure the credit. Employer-provided dependent care assistance plan. The amount of any benefit you receive under an employer-provided dependent care assistance plan may be excluded from your income. This means that you do not have to include the amount of the benefit in your income for tax purposes. The plan must meet certain requirements. Your employer can tell you whether the plan qualifies. If it does, the amount you can exclude cannot be more than the smallest of: 1) Your earned income, 2) Your spouse's earned income, or 3) $5,000 ($2,500 if married filing separately). You must subtract this excludable amount from the dollar limit ($2,400 or $4,800, whichever applies) to get the reduced limit on the amount of work-related expenses you can use to figure the credit. Statement for employee. Your employer must give you a Form W─2, Wage and Tax Statement (or similar statement), showing in box 22 the total amount of dependent care assistance benefits provided to you during the year. Example. You are a widower with one child and earn $20,000 a year at work. You pay work-related expenses of $1,600 for your 4-year-old child and qualify to claim the credit for child and dependent care expenses. Your employer pays an additional $1,000 under an employer-provided dependent care assistance plan. This $1,000 is excluded from your income. The dollar limit for your work- related expenses is $2,400 (one qualifying person). However, your credit is figured on only $1,400 of the $1,600 work-related expenses you paid because the dollar limit is reduced to $1,400 by the excludable benefits as follows: Dollar limit: Maximum allowable expenses for one qualifying person ....................... $2,400 Minus: Employer-provided dependent care benefits you can exclude from income ........ 1,000 __________ Reduced limit on expenses you can use for the credit .................................. $1,400 ========== Forfeitures. Forfeitures are amounts credited to your dependent care assistance account and included in the amount shown in Box 22 of your Form W─2, but which you did not receive because you did not incur the expense. You must subtract any forfeitures from the total employer-provided dependent care benefits reported by your employer. To do this, enter the forfeited amount on line 18 of Form 2441 or line 16 of Schedule 2 (Form 1040A). Forfeitures do not include amounts that you expect to receive in the future. Amount of Credit To determine the amount of your credit, multiply your work-related expenses (after applying the earned income and dollar limits) by the applicable percentage. The percentage depends on your adjusted gross income shown on line 32 of Form 1040 or line 17 of Form 1040A. The following shows the applicable percentage based on adjusted gross income. Adjusted Gross Applicable Income Percentage Over But not over 0 - $10,000 30% 10,000 - 12,000 29% 12,000 - 14,000 28% 14,000 - 16,000 27% 16,000 - 18,000 26% 18,000 - 20,000 25% 20,000 - 22,000 24% 22,000 - 24,000 23% 24,000 - 26,000 22% 26,000 - 28,000 21% 28,000 - No Limit 20% Alternative minimum tax limit. If you file Form 1040, your credit may be limited because of the alternative minimum tax. If you file Schedules C, D, E, or F (Form 1040), you should complete Form 6251, Alternative Minimum Tax-Individuals, to figure whether your credit will be limited. If you did not file any of those schedules, you should complete the worksheet that comes with the instructions for line 16, Form 2441, to see if you still need to complete Form 6251. How to Claim the Credit To claim the credit, you can file Form 1040 or Form 1040A. You cannot claim the credit on Form 1040EZ. You must file a joint return if you are married, unless the exceptions discussed earlier under Joint Return Test apply to you. Form 1040. You must complete Form 2441, Child and Dependent Care Expenses, and attach it to your Form 1040. Form 1040A. You must complete Schedule 2 (Form 1040A), Child and Dependent Care Expenses for Form 1040A Filers, and attach it to your Form 1040A. See Chapter 38 for an example and a filled-in Schedule 2. Tax credit not refundable. Your credit for child and dependent care expenses cannot be more than the amount of your tax liability. Therefore, you cannot get a refund for any part of the credit that is over that amount. Extra credit for child born in 1992. If you claim the part of the earned income credit that is an extra credit for a child born in 1992, you cannot claim the credit for child and dependent care expenses for care of that child. If you are eligible to claim both credits for the same child, you must choose only one. Choose the credit that will give you the lowest tax or the largest refund. If you don't owe any tax and did not receive any employer-provided dependent care benefits, claim the extra credit for child born in 1992 to get the largest refund. If you choose the extra credit for child born in 1992, you can still claim the child and dependent care credit for your other qualifying children. To claim the extra credit for child born in 1992, you must claim the earned income credit. You may be able to claim the earned income credit if your adjusted gross income (shown on line 32 of your Form 1040, or line 17 of your Form 1040A) is less than $22,370. If you need more information about the extra credit for a child born in 1992, see Chapter 35. Records. You should keep records of your work-related expenses. Also, if your dependent or spouse is not capable of self-care, your records should show both the nature and the length of the disability. Other records you should keep to support your claim for the credit are described earlier under Provider Identification Test. Employment Taxes for Household Employers Generally, if you pay someone to work in your home, such as a babysitter, that person is your household employee. If you have a household employee you may be subject to: 1) Social security and Medicare taxes, 2) Federal unemployment tax, and 3) Federal income tax withholding. Social security and Medicare taxes are withheld from the employee's pay and matched by the employer. Federal unemployment tax (FUTA tax) is paid by the employer only and is for the employee's unemployment insurance. Federal income tax is withheld from the employee's total pay if the employee asks you to do so and you agree. If you use a placement agency to get a babysitter or companion who works in your home, that person is not your employee if the agency sets the fee and exercises control over the sitter. This control could include providing rules of conduct and appearance and requiring regular reports. In this case, you do not have to pay employment taxes. But, if an association merely gives you a list of sitters and you hire one from that list, the sitter may be your employee. Social Security and Medicare Taxes If you pay a household employee cash wages of $50 or more during a calendar quarter, those wages are subject to social security and Medicare taxes. Payments in kind (meals, transportation, etc.) are not used to figure the $50 amount or to figure the taxes. The taxes are figured on all cash wage payments in the quarter, regardless of when they were earned. Both you and the employee pay a share of the social security and Medicare taxes on the employee's wages. For 1992 the tax rate for social security is 6.2% for both you and the employee (a total of 12.4%). The tax rate for Medicare is 1.45% for both you and the employee (a total of 2.9%). The 6.2% social security tax applies only to the first $55,500 you paid each employee during calendar year 1992. The 1.45% Medicare tax applies to the first $130,200. You must pay the total of these taxes yourself if you do not deduct the employee's share from his or her wages. Any of the employee's share you pay is added income to the employee. This income must be included in box 10, Wages, tips, other compensation, on Form W─2, Wage and Tax Statement, but do not count it as cash wages for social security and Medicare purposes. You must also include the employee social security and Medicare taxes you pay in boxes 11 and 15 of the employee's Form W─2, even though the taxes were not actually withheld. You report and pay the social security and Medicare taxes quarterly on Form 942, Employer's Quarterly Tax Return for Household Employees. The form has instructions for filling it out and tables to determine how much to deduct from the employee's wages. Income Tax Withholding If your household employee requests income tax withholding, and you agree, you must withhold an amount from each payment based on the information shown on the Form W─4, Employee's Withholding Allowance Certificate, given to you by the employee. Publication 15, Circular E, Employer's Tax Guide, explains how to figure the amount to withhold. Earned income credit advance payment. You must make advance payments of the earned income credit to any employee who is eligible to claim the earned income credit and requests advance payment of it. Who is eligible to claim the credit is explained in Chapter 35. The employee makes the request by giving you a completed Form W─5, Earned Income Credit Advance Payment Certificate. Each payday, you make the payments to your employee from the social security, Medicare, and withheld income taxes that you would otherwise pay to the Internal Revenue Service. For more information, see Publication 15. You must notify any employees not having federal income tax withheld that they may be eligible for an income tax refund because of the earned income credit. For more information, see the instructions for Form 942. Filing Form 942. You must report on Form 942 the taxes withheld each quarter if: 1) You are liable for social security and Medicare taxes, or 2) Your employee asked you to withhold federal income tax and you agreed. If you own a business as a sole proprietor, you can include your household employee on Form 941, Employer's Quarterly Federal Tax Return. Do not include your household employees on a Form 941 filed for a partnership or corporation. When to file. File starting with the first quarter in which you: 1) Pay wages subject to social security and Medicare taxes, or 2) Withhold any federal income tax. Due Dates for Returns Quarter Ending Due Date Jan.-Feb.-Mar. Mar. 31 Apr. 30 Apr.-May-June June 30 July 31 July-Aug.-Sept. Sept. 30 Oct. 31 Oct.-Nov.-Dec. Dec. 31 Jan. 31 If the due date for filing a return falls on a Saturday, Sunday, or a legal holiday, you can file the return on the first business day after that day. For more information about employment taxes for household employers, see Publication 926, Employment Taxes for Household Employers, and the instructions for Form 942. Federal Unemployment Tax (FUTA Tax) Federal unemployment tax (FUTA tax) is for your employee's unemployment insurance. If you paid cash wages of $1,000 or more to household employees in any calendar quarter this year or last year, you are liable for FUTA tax for any employees you have this year. However, FUTA tax does not apply to wages paid to your spouse, to your parents, or to your children under 21 years old. Rate. The rate is 6.2% on the first $7,000 of cash wages paid to each employee during the calendar year. The FUTA tax is imposed on you as the employer. You must not collect or deduct it from the wages of your employees. You can take a credit against your federal unemployment tax for the unemployment tax you pay to the state. Your net federal tax may be as low as 0.8% if you pay the state tax on time. When you hire a household employee, you should contact your state employment tax office to get information on how to file the state return and to get a state reporting number. The state will give you your experience rate, which you use to figure the amount of tax you will pay the state. You must file an annual return on Form 940─EZ or Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, by January 31 following the close of the calendar year for which the tax is due. Form 940─EZ is a less complicated version of Form 940 and can be used if: 1) You paid state unemployment tax to only one state, 2) You paid all your state unemployment tax by the due date of Form 940─EZ, and 3) Your Federal unemployment (FUTA) wages were also taxable for your state's unemployment tax. If you do not meet these requirements, you must use Form 940 to report your federal unemployment taxes. Any tax still due must be paid with the return. After you have filed your first return, the IRS will mail Form 940─EZ or Form 940 to you. However, if you do not receive it, get one in time to file. For more information, see Publication 926 and the instructions to Form 940─EZ or Form 940.