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In order to retain valued employees and improve the corporate image, and at the same time gain tax benefits for themselves, many companies offer some type of financial help to employees who must pay for child or dependent care in order to work.
These benefits can take a number of forms.
- Dependent care as a fringe benefit — In some cases, the employer has set up on-site daycare centers, to which employees can send their young children. In other cases, employers subsidize the costs of child care by reimbursing employees for certain expenses.
- Salary reduction assistance — however, the majority of companies that provide dependent care assistance do so by allowing employees to contribute part of their pretax wages to individual accounts under a "Flexible Spending Arrangement." The money is then used to reimburse the employee for child or dependent care expenses.
- Claiming employer-provided assistance — all these types of assistance can be provided to the employee as tax-free fringe benefits, provided certain rules are met.
Employers may also offer a number of other dependent-related services, such as referrals to area day care centers, seminars or informational meetings, or employee assistance programs that provide counseling for personal problems that affect an employee's work. In most cases, these benefits are considered tax-free fringe benefits for employees because they fall into the category of "de minimis" benefits. Their value is relatively small and difficult to measure, so the IRS essentially ignores them when it comes to imposing taxes.
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