Using a Dependent Care FSA to Pay Your Nanny: What You Need to Know

Leslie Daley

February 3, 2026

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-- min read

What is a Dependent Care FSA?

Let’s talk about Flexible Spending Accounts (FSAs) first. An FSA is a type of account that lets you set aside pre-tax funds to pay for qualified medical or care expenses. FSAs are considered “tax-advantaged” because you save on taxes when utilizing them.

There are actually three types of FSAs:

Healthcare FSA: This can be used for qualified medical, dental, and vision expenses. This is typically the type of FSA people are referring to when they talk about an “FSA” without any other descriptors.
Dependent Care FSA (DC FSA): This is an FSA that can be used for qualified expenses related to caring for a dependent, such as nannies, daycare, preschool, camp, and more. This is the type of FSA we will be discussing in this post.
Limited Purpose FSA (LP FSA): This is a pre-tax FSA typically used for qualified dental and vision expenses.

There are annual contribution limits that cap how much you can contribute to a Dependent Care FSA. In 2026, those limits are $3,750 if you are married and file separately, and $7,500 if you are married and file jointly, if you’re single, or if you are Head of Household. This limit is an increase from 2025.

A Dependent Care FSA can be a great way to save money and avoid paying your nanny under- the-table, but there are some important rules to understand to make sure you qualify to use one and to make sure you use it correctly. Let’s get into those details.

Can you use a Dependent Care FSA to pay your nanny?

The short answer? Yes, you can use a Dependent Care FSA to pay your nanny.

The long answer? You have to make sure you pay attention to the details so your nanny expenses are qualified. There are specific rules about who qualifies as a nanny, what work they do, how you pay them, and what documentation you should keep.

Eligible dependents

In order to use a DC FSA for eligible childcare expenses, your child must be under the age of 13 andmust have lived with you for more than half of the year. You can also use a DC FSA for qualified care expenses for a spouse or relative who is not capable of caring for themselves and lives in your home. Check out this article for more info on paying for family caregiving.

Eligible caregivers

According to the IRS, an eligible caregiver cannot be:

Your spouse
Your child’s parent
You or your spouse’s dependent
Your child who was under 19 years old at the end of the year, even if they are not your dependent

Eligible expenses

A Dependent Care FSA is a specific type of fringe benefit designed to help out working parents. As such, all care expenses must be so you or your spouse can go to work, look for work, or attend school full-time. While it might be tempting, you can't claim nanny services provided for date night or other activities that are not related to you or your spouse working.

Requirements for nanny payments

As you can probably guess, it’s very important that your nanny is paid legally so that you have all the proper documentation you need to prove you are using your DC FSA to pay them for qualified services.

You must file Form 2441 annually to report your dependent care expenses and any Dependent Care FSA benefits as part of your tax return. To complete Form 2441 correctly you must keep detailed records of what you paid and to whom. This includes receipts or proof of payment for services, your nanny’s full name, their address, and their SSN or EIN. If your family is using payroll services like Poppins Payroll to pay your nanny legally, this info is typically automatically tracked and generated.

How to set up and use a Dependent Care FSA for nanny payments

In order to take advantage of the tax savings that come with a DC FSA, you first have to have an employer that offers this type of account. Then, you have to enroll, choose your contribution, and submit your claims appropriately. Then you can get to the good part – getting reimbursed for your expenses.

Setting up your DC FSA

To access a DC FSA, your employer must offer one. Unfortunately it isn’t something you can get if you are an independent contractor or if your employer doesn’t offer one.

Typically you will be able to select to enroll in a DCFSA during open enrollment. When you enroll, you must decide how much money you’d like to contribute to the account for the plan year.

[Pro tip: Sometimes Healthcare FSAs are prefunded, meaning your employer fronts your annual contribution, then you pay it back via payroll deductions throughout the year. Dependent Care FSAs don’t operate this way; they are funded paycheck by paycheck, so you won’t have access to all of your annual contribution up front.]

One important thing to know about FSAs is that the funds in them are intended to be spent, meaning they are use-it-or-lose-it. This means you have to spend the funds on eligible expenses incurred during the plan year (and any grace period, if your employer offers one), or you forfeit them. So it is important to calculate how much you intend to spend on qualified care expenses during the year before you select how much money you’d like to contribute to your FSA.

Submitting claims for reimbursement

Now that you have your DC FSA all set up and ready to go, you’re probably wondering how to access those funds. Typically, your FSA provider will give you a form to fill out to get reimbursed for qualified expenses. The exact details vary by provider, but generally you’ll need to provide a receipt with the following info:

Dependent's name
Caregiver’s name
Date of service
Type of service
Cost of service

These reporting requirements are why it is so essential to keep accurate and detailed records of all payments made to your nanny or other caregivers. Without proper receipts and records, you may not receive reimbursement for your qualified expenses.

Tax implications of using a Dependent Care FSA for nanny payments

Using a Dependent Care FSA for qualified childcare expenses can be a great way to save money, because you get to use pre-tax funds to pay for those expenses. But how does it interact with other ways to save on childcare?

How a DC FSA interacts with the Child and Dependent Care Tax Credit

The Child and Dependent Care Tax Credit (CDCTC) is a federal tax credit that exists to help eligible parents pay for childcare. In 2026 the maximum credit allowed ranges from 20 percent to 50 percent of your care expenses, depending on your family’s adjusted gross income (AGI). The creditable amount is capped at $3,000 for one qualifying dependent or $6,000 for two or more qualifying dependents.

The CDCTC and a DC FSA are both great ways to save on childcare expenses, but you can’t “double-dip,” meaning you can’t use both on the same expenses. The CDCTC only applies to unreimbursed childcare expenses. So if you contribute the maximum to your DC FSA ($7,500 in 2026) there would be nothing left to claim under the credit. To learn more about the details of how a DC FSA and the CDCTC interact, check out our article on the impacts of the One Big Beautiful Bill.

Common mistakes to avoid when using a Dependent Care FSA for nanny payments

While using a Dependent Care FSA for nanny payments can offer you great tax savings, there are a few potential pitfalls you have to watch out for to make sure that you can take advantage of these savings and avoid mistakes, fines, or other issues.

Here are some key do’s and don’ts of using a DC FSA for nanny payments:

DO	DO NOT
Appropriately pay your nanny as a household employee.	Misclassify your nanny as an independent contractor.
Keep detailed documentation of all payments for your FSA claims.	Forget to make note of important details, like when your nanny worked, how much they are paid, and more.
Understand eligibility requirements for FSA reimbursements.	Request reimbursement for paying your teenage child to watch your baby during date night.
Pay your nanny legally and compliantly.	Pay your nanny under the table or off the books.
Use a payroll service like Poppins Payroll to take care of your household employee payroll.	Try to go it alone if you are feeling confused or overwhelmed by paying your household employee.

How much can you save by using a Dependent Care FSA for a nanny?

The exact calculation of how much you can save by using a Dependent Care FSA to pay for your nanny depends on your salary, your tax bracket, how much you contribute to your DC FSA, and how much you pay your nanny.

But we can take a look at an example calculation to get a good idea of the potential tax savings. For example:

You and your spouse’s combined income is $250,000 for the year and assuming you are in the 24% marginal federal income tax bracket.
You are married and file your taxes jointly.
You spend $5,000 on qualified dependent childcare expenses for the year.

Without a DC FSA, you’d be spending $5,000 in post-tax funds. But with a DC FSA:

You contribute $5,000 in pre-tax funds to your Dependent Care FSA.
You lower your taxable income to $245,000.
You save $1,200 in federal taxes.

As you can see in this example, you are seeing a tax savings of 24% of your childcare costs by using a Dependent Care FSA to pay your nanny.

Using a Dependent Care FSA to pay your nanny

Using a Dependent Care FSA to pay your nanny can be a smart, tax-efficient way to reduce the cost of childcare, while paying your nanny legally and fairly. With the right preparation and compliance, a DC FSA not only supports your family’s childcare needs, but also helps you keep more of your hard-earned money. As always, remember to consult with a tax professional to maximize your potential childcare savings.

Using Poppins Payroll to pay your nanny

Your nanny gets paid legally, and not under-the-table.
All proper documentation is retained and easily accessible.
You get payroll records that allow you to get easily reimbursed from your Dependent Care FSA.
You get dedicated support from our team of experts.
We take care of quarterly and annual household taxes.

We take care of the details, and you can get started for free!

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