Containing the Cost of Childcare

By Rick Shaffer

As any parent can tell you, raising a child is getting more expensive. From medical insurance to children's clothing, life insurance to children's furniture, the costs associated with childrearing have, like most everything else gone way up! But of all the financial demands of having children, childcare is one of the most expensive.

From medical insurance to children’s clothing, life insurance to children’s furniture, the costs associated with childrearing have – like most everything else – gone way up! But of all the financial demands of having children, childcare is one of the most expensive.

Indeed, for more and more parents, childcare is now the most expensive part of raising a child. While costs can vary greatly (by region and type of care), in some areas the average cost of childcare is $500 to $800 per month, per child. In some locales, top-notch care can cost $1,200 or more per month, per child.

What can parents do to deal with this cost? In some cases, the choice is for one parent to cut back on his or her work schedule – or temporarily put a career on hold altogether – until the child begins full-time schooling. But for many two-parent households who depend on two incomes to make ends meet and for virtually all single parents, cutting back on work is simply not an option. The result: For most parents, the increasingly high cost of childcare is and will remain a difficult reality. However, there are some things you can do to help lower your childcare costs.

Daycare Centers

If you use a daycare center for your childcare needs, there are two things you can do to contain your costs. The first is simple: Make a careful schedule and keep close track of time. Many centers charge high late fees (as much as $1 per minute) if you pick your child up after the scheduled daily pick-up time. By carefully setting and coordinating your schedule or schedules (including anticipation of traffic and other possible delays), you can avoid these costly penalties.

Second, some daycare centers may cut your fee in exchange for services you provide to the center. For example, your center may lower your fee if you spend a number of hours each week doing cleaning chores at the center, preparing snacks and meals, helping with bookkeeping or even maintaining computer equipment used for administrative purposes. While this option is often limited or unavailable (since many centers look to all member parents to volunteer time to help keep costs down for all who use the center), if your schedule allows, it’s an option at least worth inquiring about.

Sharing a Nanny or Au Pair

If you use a nanny or au pair for childcare, consider sharing the cost with friends or neighbors. This kind of "share care" often works best for parents of toddlers. The concept is simple: two or more families share a live-out nanny or au pair and share the fee.

Often, families in a share-care arrangement alternate whose home the nanny or au pair travels to (and where the children are taken care of) on a weekly or monthly basis. In an alternative share-care arrangement, a nanny or au pair who lives with and cares for one family’s children full time will care for the children of that family and one or two other families’ children in that home during the day.

A share-care arrangement offers a couple of advantages:

• It’s an affordable way to get the more expensive, but what many parents consider to be higher quality, care provided by a qualified nanny or au pair.

• Your child spends time in a familiar setting (if all or some of the childcare is done in your home) and receives more one-on-one attention, while still having the opportunity to interact and socialize with other children.

• It provides an opportunity to build a network with the other families in the share care.

However, in order for share care to work, you will have to:

• Agree with other parents about the nanny or au pair you hire.

• Feel comfortable having that nanny or au pair care for a number of children at one time with no one else there to monitor him or her.

• Agree on guidelines regarding what foods to serve, how much TV to allow, and what disciplining philosophy should be followed.

It’s also a good idea to:

• Sign a detailed contract with the nanny or au pair, setting out the caregiver’s exact duties, the childcare guidelines – agreed to by all of the parents – that he or she will follow, exactly how much each family will pay, how any taxes will be divided, and exactly how any problems that might arise will be handled.

• Agree to meet on a regular basis to discuss the arrangement, and make adjustments and solve any problems that arise.

Tax Savings

There are two basic tax benefits families can choose from to help lower their childcare costs:

Childcare Tax Credit – Under the federal tax laws, you can take a tax credit (of between $480 and $720 with one dependent child, or $960 to $1,440 with two or more dependent children) each year, depending on your income, if:

• You incur qualified childcare expenses for a child under age 13 whom you claim as a dependent.

• These expenses are incurred so you can earn income (if married, both spouses must work full or part time, unless a spouse is a full-time student or is disabled).

Qualified childcare expenses can include the cost of a nanny or au pair; a daycare center, nursery school, day camp or in-house babysitter; or domestic services in the home (such as cooking, cleaning or laundry) that are at least partly for the benefit of the qualifying person.

Flexible Spending Accounts (FSAs) – Under the federal tax laws, if your employer allows, you can set up and contribute to a flexible spending account. Under an employer-sponsored FSA, you can contribute up to $5,000 of your salary per year to an account used to pay for qualified childcare expenses. The salary contribution is exempted from state and federal income taxes, as well as Social Security and Medicare withholdings.

However, you can only contribute to an FSA if your employer offers one. But some employers who offer FSAs also match all or part of your contribution (the total contributed to the FSA still cannot exceed $5,000 per year). And, you must spend all of the money contributed on qualified childcare expenses during that year, or lose the money.

Finally, you must set up and designate how much you will contribute to a childcare FSA before the beginning of the year. Once it’s set up, you can’t discontinue the contribution during the year unless there is a "qualifying change" – under IRS guidelines – to your family or work status during the year.

Be aware too that money contributed to a childcare FSA will offset (and, in many cases, completely bar you from taking) the childcare tax credit. As a result, in most cases, parents need to analyze and choose between the two (FSA or childcare tax credit) before the beginning of each year.

How do you decide? As with most tax questions, you should consult with your accountant before making the choice – both to decide which choice is best for you and to be sure you use the FSA or childcare tax credit properly. However, a quick "rule of thumb" starting point is that the higher your income, the more likely it is that an FSA will save you more money.

Rick Shaffer is an attorney, financial writer and host of "The Money Show," a call-in radio show.

From United Parenting Publications, April 2003.