How much does a daycare flexible spending account really save you?

ALICIA SHAUL
CPA MBA

The IRS allows employees to designate up to $5,000 of wages to be tax free to pay for qualified daycare costs when employers have a qualified cafeteria plan set up. Cafeteria plans are a tax savings win/win for both the employer and the employee. Employers save roughly $382.50 per employee in Social Security and Medicare taxes. Employees save roughly $1,250 in Social Security, Medicare,
federal and state income taxes.

If employees have two or more children, there are $1,000 of daycare costs still eligible for the federal and state daycare credits to use on their personal income tax return. The remaining daycare credit still available on the income tax return for people with two or more children is roughly $200 which brings their total savings to $1,450. Both scenarios are better than just using the daycare credit.