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Do You Have a Bonus Coming? |
December 2004
Now is the time of the year to see if parents can give you a bonus without having to pay any extra money. How is this possible?
Many employers offer a payroll option that allows their employees to set aside some of their wages to pay for child care expenses before the money is taxed. These plans are called dependent care plans, flexible benefit plans, cafeteria plans, salary reductions plans, or pre-tax spending accounts. Parents who participate in these plans can save hundreds of dollars in taxes. The maximum amount parents can set aside in such plans is $5,000 per year, per family. Parents make the decision about how much money to set aside before the year begins, and their employer keeps any unspent money.
You want to make sure that you, not the employer, receive this unspent money.
Here's how to get this money. Calculate how much parents will pay you by the end of the year. If the amount is more than $5,000, there is no unspent money and there is nothing further you can do. If the amount is less than $5,000, then say this to the parent: "I know that you participate on a dependent care plan at work. My records indicate that you will pay me approximately $x by the end of the year. If you set aside more money in your plan than this amount, this unspent money will be kept by your employer. However, if you give me this unspent money I will spend it to increase the quality of care available to your child." For example, if the parent will pay you $4,800 this year and she set aside $5,000, you want the parent to give you the extra $200. If the parent needs some convincing to give you the money, tell the parent you will spend the money on items that will improve the quality of your program (toys, equipment, training, etc.).
Some parents may want you to apply the unspent money to the care you provide next year. This is illegal, so do not agree to this. Money set aside under these plans can only be spent on child care services delivered this year.
If the parent agrees to give you the money, just add the extra amount to the parent's next payment due, or you can spread it out over payments made until the end of the year. If you want, you can submit a bill to a parent in January or February next year for the unspent money from this year as long as you indicate on the bill that the payment is for some week of child care services this year. (Parents have until March 31 to submit a receipt to their employer for child care services delivered this year.) There is nothing wrong with adding an extra amount onto your normal child care bill, or giving the parent another receipt for the same week in December.
The parent should submit a receipt to their employer for this money exactly the same way they submit all other payment receipts. If there is $200 in unspent money, and you regularly charge $100 a week, ask the parent to pay you $300 for care next week. Because this money is being spent on child care services it should not be identified as a "bonus" or "charitable contribution." There is nothing wrong with the parent deciding to pay you an extra amount for the care you provide.
All money set aside in a dependent care plan must be spent on child care services delivered this year. Since the parents will lose this money unless they give it to you, most parents will agree to this arrangement. You must report any extra money you receive as income, and you can deduct any items you purchase for your business with this money. We have heard from many providers who have received extra money from parents, ranging from $50 to $1,500.
Under what situations would a parent not spend all the money set aside in their plan? Parents who changed caregivers in the middle of the year, parents who missed a lot of work because of illness, parents who overestimated their child care expenses, etc.
This handout was produced by Think Small (www.thinksmall.org).
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