Do I Need a Business License to Write Off My Nanny Expenses?

You can deduct portions of your childcare expenses when you're working.

The cost of childcare can be significant, but you may be able to offset some of those expenses on your federal income tax return. You do not need a business license to qualify, but you must meet specific requirements as to your child's age, the type of childcare services you receive and why you receive those services. You also must meet income guidelines.

Qualifying Child

If you want to be able to deduct the cost of childcare or a nanny on your income tax return, your child must meet the qualifying child rules. A qualifying child for the purpose of childcare deductions is one that is under the age of 13, is listed as a dependent on your income tax return, cannot be claimed as a dependent by another person, and who is related to you by birth, marriage or legal means such as adoption.

Qualifying Provider

You're allowed to deduct some of your childcare expenses if the provider you use is a qualifying provider. A nanny is allowed as long as she meets the qualifying provider rules. A qualifying provider is an individual or business that is not also your own dependent. The provider also cannot be your spouse, and he cannot be a parent of the child you're claiming the childcare deduction for.

Deduction Limitations

For tax deduction purposes, you can only count the childcare costs you incur when you're working or looking for work. If your child's nanny provides childcare while you are working, you can count that time towards your childcare tax deduction. If she also watches him while you are out with friends, you cannot count the cost of that time towards your deduction. Only 20 to 35 percent of your childcare costs can be deducted, and the amount of your allowed deduction is based on your adjusted gross income.

In-Home Childcare

If you pay your child's nanny to look after him in your own home, you may meet the definition of a household employer. If so, you may be required to pay the nanny's Social Security, medicare and unemployment taxes.

References

• IRS: Topic 602 -- Child and Dependent Care Credit
• IRS: Topic 756 -- Employment Taxes for Household Employees