I’m Self-Employed: Can I Deduct Childcare Costs?

May 3, 2022 | Deductions

Here at Tax Savvy Jessica, the majority of our clients are 1) self-employed entrepreneurs, and 2) women.

Thankfully, the days of having to choose between motherhood and career are over. But this new reality also means trying to “do it all” can come at a cost – specifically childcare cost.

With the cost of living on the rise, paying for childcare can be a financial stretch for many self-employed women. Which makes many wonder, is the cost of childcare tax deductible?

The answer is…sort of.

If you pay for childcare for a child or children under the age of 13, you could claim a tax credit.

So what is the difference between a tax credit and a deduction? And how much money are you really saving?

Let’s discuss!

Credit vs Deduction

Talk of taxes can mean an endless litany of tax jargon being tossed around.

Credits, deductions, refunds, qualifying expenses…words that can mean nothing and everything at once!

Although tax credits and tax deductions sound like they achieve basically the same thing (less money paid out in taxes by you!) – there are key differences.

A tax deduction reduces your final income amount for which you’ll owe taxes. Say you earned $80,000, but you’re able to deduct $10,000 in expenses. Your total tax burden would then be calculated based on the income minus deductions, or $70,000.

A tax credit is a direct, dollar-for-dollar reduction on your final tax amount. For example, if you owed $8,000 in federal taxes, but had a $1,000 tax credit, your final tax bill would be $7,000.

How to Reduce Your Childcare Costs

The tax credits available for these costs are applicable to children under the age of 13 or a dependent of any age. The recently updated American Rescue Plan Act of 2021 increased the amount you could receive on child and dependent care overhead.

You can now claim a tax credit calculating total expenses up to $8,000 for one qualifying individual, or up to $16,000 for two or more qualifying individuals. These expenses include, but are not limited to; babysitting costs, day and summer camp fees (excluding overnight camps), and before or after school care.

Do You Meet the Criteria?

  • Unfortunately receiving this tax credit isn’t as easy as showing the IRS your grocery bill (because raise your hand if your kids are eating you out of house and home!). Instead, you have to meet certain criteria:
  • You must have an earned income from the previous tax year (i.e. your business must have a profit greater than its expenses).
  • You must work and earn an income or be actively looking for employment.
  • You must be the qualifying person’s parent or caretaker.
  • The qualifying person(s) must be a child age 13 or younger, or mentally or physically disabled of any age.
  • The provider of childcare can not be a dependent, your spouse or a parent of the child.

Interested in having someone else do the income tax heavy lifting for you? Let a Taxpert at Tax Savvy Jessica take the wheel on this, and steer you through the twists and turns of tax credits and deductions.

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I’m the passionate tax-pert behind Tax Savvy Jessica. I spent more than 10 years performing audits for the IRS. My experience there taught me how to understand taxes from the perspectives of both taxpayers and the IRS.

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