Can I Pay Childcare Costs Through My S-Corporation?

Thanks for the info. So does that mean even though I only have one part-time employee, I could still potentially set up a DCAP? How exactly does the non-discrimination testing work? Would I need to offer the same dollar amount to my employee or just make them eligible for the program?

For non-discrimination testing, you don't need to offer the same dollar amount, but the benefit needs to be available on similar terms. Typically, this means offering a percentage of compensation rather than a flat amount, so it scales appropriately. Your part-time employee would need to be eligible, though their actual benefit would be proportional to hours worked and compensation. Remember that S-corp owners who own more than 2% (including attribution rules through family members) face additional restrictions - benefits provided may be treated as taxable wages rather than tax-free benefits. This is why documentation and proper plan establishment are crucial.

Does taxr.ai actually provide custom advice or is it just generic info I could find on Google? I'm in a similar situation but with an LLC taxed as an S-corp and would love to know if it can handle more complex setups like mine.

I'm skeptical about AI tools for tax advice tbh. How accurate was it really? Did you have a professional review their recommendations before implementing anything? S-corp rules are so finnicky I'd be nervous trusting an algorithm.

It's definitely not generic information - the system analyzed my specific business structure and provided tailored recommendations based on my returns and entity type. It identified optimization opportunities I hadn't considered based on my specific situation. For complex setups like an LLC taxed as an S-corp, it actually excels because it can parse through the various tax rules that apply to your specific entity structure. It shows you the relevant code sections and explains how they apply to your situation, which saved me hours of research.

Wait, how does this actually work? I thought it was impossible to get through to the IRS these days. Do they just keep calling for you or something? I've been trying to get clarity on a similar issue for weeks.

This sounds like a scam honestly. Why would I pay someone else to call the IRS when I can just do it myself for free? And even if you do get through, the agents often give conflicting information. I've been told completely different things by different IRS reps about S-corp rules.

They use a system that essentially holds your place in line and calls you when an agent is about to be available. It's not that they have some special access - they're just handling the painful waiting process for you so you don't waste hours with your phone on speaker. I was skeptical too, but the IRS agent I spoke with was actually from the business tax department and knew exactly how to address my S-corp question. You're right that sometimes you can get inconsistent answers, but I specifically asked for someone familiar with S-corporation rules, and they transferred me to the right department. The key is knowing what to ask for when you finally get through.

I hadn't considered a cafeteria plan! How complicated is it to set one up for a tiny S-corp? And what kind of ongoing administrative costs should I expect? The $5,000 limit is a lot less than the $15,600 we'll be paying annually, but it's certainly better than nothing.

Setting up a cafeteria plan for a small S-corp isn't as complicated as it sounds. You'll need a plan document and summary plan description - these can cost around $500-1000 initially if you use a benefits attorney or specialized provider. Annual administration typically runs $350-750 depending on services. You're right that the $5,000 limit doesn't cover your full $15,600 annual cost, but it's pre-tax dollars which helps. For the remaining amount, you might still qualify for the Dependent Care Tax Credit on your personal return, though you can't double-dip on the same expenses. Many S-corp owners find that the tax savings justify the administrative costs, especially if you plan to use it for multiple years.

Hiring your spouse in your S-corp *can* help in certain situations, but probably not for what you're trying to do. It doesn't really change the DCAP limitations because you'd still face the same non-discrimination testing issues. Plus, if you're married filing separately as the OP mentioned, it could actually create more complications with attribution rules for determining business ownership.

This is really helpful - I hadn't thought about the timing issue with wages vs benefits. Since I'm just getting started with this, when you mention "adequate W-2 wages to absorb the benefits," does that mean I need to have already paid myself at least $5,000 in salary before I can use the dependent care benefit? Or is it more about having enough total annual salary to justify the benefit amount? I want to make sure I structure this correctly from the beginning.

Great question! It's about the annual relationship, not a month-by-month requirement. The IRS looks at whether your total W-2 wages for the year are sufficient to support the fringe benefits provided. So if you're planning to use $5,000 in dependent care benefits, you need to ensure your annual reasonable salary is at least that amount (though realistically, it should be much higher since "reasonable compensation" for S-corp owners is typically based on what you'd pay someone else to do your job). The key is consistent payroll throughout the year rather than timing the benefits to specific paychecks. You can start using the dependent care FSA as soon as the plan year begins, even if you haven't yet earned enough wages to "cover" it, as long as your projected annual salary will be adequate. Just make sure you're taking regular payroll distributions rather than waiting until year-end to pay yourself a lump sum salary.

This is a crucial point that completely changes the analysis! I had no idea that married filing separately would split the $5,000 DCAP limit in half. That makes the cost-benefit calculation much trickier. Given the administrative costs mentioned earlier ($500-1000 setup plus $350-750 annually per plan), you'd be looking at potentially $1,400-3,500 in total costs across both S-corps just to shelter $5,000 in dependent care expenses. The tax savings might not justify those expenses, especially in the first year. @e75add0e4530 Do you happen to know if there are any other factors we should consider when evaluating married filing jointly vs separately for S-corp owners? I'm wondering if the DCAP benefit alone would tip the scales, or if there are other business-related advantages to filing jointly that might make the switch worthwhile.