If you’re the primary caregiver, it’s not easy to justify paying someone to replace you while you’re at work. Sometimes, it can even feel like so much of your paycheck is going toward dependent care expenses that you’re really paying for the privilege to work.

That’s where a Dependent Care Flexible Spending Account (DCFSA) comes in. These accounts help working parents and caregivers pay for the care that allows them to go to work. Depending on your effective tax rate, a DCFSA could save you thousands of dollars every year.

Plus, eligible parents may be able to take advantage of a Dependent Care FSA and the child and dependent care tax credit. Here’s what you need to know.

What is a dependent care FSA, and how does it work?

The Dependent Care Flexible Spending Account allows you to set aside pre-tax money from each paycheck, which you can use to pay for dependent care services. This can include child and adult day care, summer day camps, preschool and more. With this arrangement, the money you spend on those expenses are effectively tax free.

Unlike Healthcare FSAs, Dependent CARE FSAs are not front-loaded. This means that you fund the account throughout the year with each deduction from your paycheck, and you can use the money once it’s deposited into the account. With Healthcare FSAs, on the other hand, you get the full amount that you’re scheduled to contribute throughout the year at the beginning of the plan year.

The IRS limits how much you can contribute to a Dependent Care FSA each year. Also, there are some restrictions on how and when you can use the funds.

Finally, it’s important to note that you can only gain access to a Dependent Care FSA through your employer. According to the Bureau of Labor Statistics, 42% of American workers had access to one in 2019. In some cases, employers can even choose to make contributions on your behalf.

Am I eligible for a Dependent Care FSA?

A Dependent Care FSA is an employee-provided benefit, so you can only open one if your employer offers it. If that’s the case, here are some eligibility requirements:

• You’re the primary caregiver to a child under 13. Or an elderly parent or a family member who is incapable of self care.

• The person or people for whom you provide care live with you full-time.

• If you’re divorced with a child under the age of 13, you’re the parent with primary custody.

• If you’re married, both spouses must either work or be looking for work that earns money.

If you don’t follow the eligibility rules around Dependent Care FSAs, you will lose the money you contribute. Additionally, you’ll owe income taxes on those contributions.

Contributing to a Dependent Care FSA

Want to contribute to a Dependent Care FSA? You’ll need to set it up during your employer’s open enrollment process.

At that time, you’ll choose the amount you want to save during the year. Then your employer will take the appropriate amount out of each paycheck and deposit it into your account. Your employer may choose to contribute to your account, but they are not required to do so.

Each year the IRS sets annual Dependent Care FSA contribution limits, which differs if you are a married couple filing jointly or separately.

While you’ll determine how much you want to save during the open enrollment period, you can update the amount if you experience a Qualifying Life Event, which can include:

• You've had a change in marital status.

• You've had a change in the number of dependents.

• The cost of your dependent care services has changed significantly.

• You or your spouse has had a change in employment status.

• Something happened to change one of your dependent’s eligibility. For example, an older child or parent becomes disabled, or your dependent is no longer eligible.

• You or your eligible dependent has had a change in residence.

Using a Dependent Care FSA

To use your savings for an eligible expense, you may have several options available to you. For example, you can use a debit card connected to your account or pay out of pocket and submit claims to receive reimbursement.

Depending on the provider, you may be able to submit claims online or through a mobile app. Some FSA administrators may even offer to pay your caregiver directly.

If you opt to pay the expenses and get reimbursed, it will come as either a check mailed to your address or a direct deposit into your account.

Eligible Dependent Care FSA Expenses

If you’re considering using a Dependent Care FSA, it’s important to make sure that your dependent care-related expenses are eligible. You can find the full list on the IRS website, but here are some examples:

• Physical care

• In-home care like an au pair, nanny, or babysitter

• Licensed nursery schools

• Qualified childcare centers

• Adult daycare facilities

• After-school programs

• Summer camps for children under the age of 13 (but not overnight)

• Preschool tuition

• Household services that are at least partly for the well-being and protection of your qualifying dependent

• Dependent care centers

• Transportation provided by caregivers

• Application fees, deposits, etc. required for obtaining care (but only if care subsequently provided)

• Taxes paid on wages

• Work-related expenses paid to certain relatives, as long as they’re not your dependents

Ineligible Expenses for a Dependent Care FSA

In some cases, something you may think is an eligible expense isn’t included in the list provided by the IRS. The following are some of the expenses that you CANNOT use your FSA to pay for:

• Babysitting that’s provided by a sibling or child under the age of 19. Or another individual who can be claimed as a dependent.

• Babysitting for extracurricular activities like date night.

• Education like private school or tutoring.

• Overnight camps.

• Enrichment activities like sports or music lessons.

• Custodial nursing care or long-term care for parents not living with you.

Remember that it’s possible to take advantage of a Dependent Care FSA and the child and dependent care tax credit. The tax credit can reduce your tax liability by up to $3,000 for one qualifying dependent or $6,000 for two or more. However, it’s a non-refundable tax credit, so you may not benefit much if you’re expecting a tax refund.

Also, you can’t double-dip. In other words, if you’ve covered expenses with your Dependent Care FSA, you can’t claim those same expenses to get the tax credit.

Do I Get to Keep My FSA Contributions?

You must use your contributions within the plan year or risk forfeiting what remains. Many employers will give you a grace period after the year ends to claim expenses from the previous plan year. But, there is no rollover option like there is with the Healthcare FSA or Limited Purpose FSA.

Also, note that you’ll lose the money you contribute to your Dependent Care FSA if you leave your employer. As a result, plan to use what you’ve accumulated before your last day of work.

Dependent Care FSAs can lower your tax burden and ease the financial obligation that comes with being a primary caretaker. It could even help you stay in the workforce.

And there’s a bonus! You can maintain a Health Savings Account, which offers the similar tax benefits on health care expenses, along with this type of FSA. If you have further questions, ask your HR department about your company’s particular benefits plan.