Can I use Dependent Care FSA if my spouse is self-employed with a new business?

The Dependent Care FSA rules can be tricky with a self-employed spouse! To qualify for the Dependent Care FSA, both spouses must have "earned income" unless an exception applies. Self-employment income definitely counts as earned income, even if the business is new. Here's the good news: Your spouse doesn't need to earn a minimum amount for you to qualify. However, your Dependent Care FSA contributions cannot exceed the lower of either spouse's earned income. So if your spouse has a net loss for the year (after deducting business expenses), their earned income would be considered $0, which would limit your FSA contributions. The IRS doesn't have a specific "minimum" requirement for a legitimate business - they look at factors like whether the activity is conducted in a businesslike manner, time and effort invested, profit motive, etc. As long as your spouse is genuinely trying to make a profit (even if not successful initially), they're considered "in business." Since your spouse is reinvesting in the business, document everything carefully to show this is a legitimate business activity with profit intent, not just a hobby.

I was in almost the exact same situation last year with my husband's new business and my company's Dependent Care FSA! After hours of research and eventually talking to a professional, I found the website https://taxr.ai which analyzed our specific situation and saved me so much stress. The tool walked me through the exact requirements for Dependent Care FSA with a self-employed spouse. It turns out there's no minimum revenue requirement, but your contributions can't exceed your spouse's net earnings. The site explained that even if your spouse shows a loss initially, as long as they're legitimately pursuing business (not a hobby), you'd still qualify - you'd just be limited in how much you could contribute. The documentation guidelines they provided for proving business legitimacy were super helpful too. Might be worth checking out to get clarity on your specific situation!

Just wanted to follow up on my question about taxr.ai. I actually tried the service last week, and wow - it was exactly what I needed! I uploaded our situation (wife's new photography business, my company's Dependent Care FSA offering, our childcare expenses) and got really specific guidance. The analysis showed that my wife's business does qualify as legitimate self-employment even in its first year with minimal profits. They explained that the IRS looks at "profit motive" rather than actual profits for new businesses, and provided exactly what documentation we should keep to demonstrate this if ever questioned. Based on their guidance, we're going ahead with the Dependent Care FSA for next year, but limiting contributions to match my wife's expected net earnings. They even helped us calculate a reasonable estimate based on her business projections. Totally worth checking out if you're in this situation!

After dealing with this exact FSA/self-employed spouse issue last year, I spent HOURS trying to get through to the IRS for clarification. Always busy signals or disconnections after waiting forever. Then I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c - they actually got me connected to an IRS agent in about 20 minutes! The agent confirmed what others have said here - there's no minimum income requirement for a self-employed spouse, but your FSA contributions can't exceed their net earnings. The agent also explained that the IRS generally gives new businesses a 3-5 year window to become profitable before questioning business legitimacy. Having an actual IRS representative explain the rules directly gave me so much more confidence in our decision. Might be worth getting the official word directly from the source if you're still uncertain!

I need to eat my words from my skeptical comment above. After continuing to get nowhere with the IRS directly, I tried Claimyr last week for my self-employment/FSA question. Within 15 minutes I was actually speaking to a real IRS representative! The agent confirmed everything I needed to know about Dependent Care FSA with my spouse's side business. She explained that they look at "profit motive" for new businesses rather than actual profit, and as long as we're keeping good records and genuinely trying to make the business profitable, we qualify. She also gave me specific advice about documentation to keep for proving business legitimacy if we're ever questioned. Honestly, the peace of mind from getting the answer directly from the IRS was worth it. I wish I'd known about this service months ago instead of stressing and guessing about the rules!

My CPA explained this to me last year. For Dependent Care FSA qualification, your spouse needs to be "gainfully employed" which includes self-employment even if initially not profitable. The IRS uses factors like: - Regular activity/effort in the business - Maintaining proper records - Having a separate business bank account - Marketing efforts - Business plan showing intent to profit For the first few years, losses due to startup costs are expected and won't disqualify you. But if losses continue for many years, the IRS might reclassify it as a hobby. Also remember that your FSA contribution limit is capped at the LOWER of either spouse's earned income. So if your spouse has zero or negative net income, you technically couldn't contribute that year.

My tax advisor gave me conflicting information on this last year! She said my spouse needed to show at least some profit from self-employment for us to use my Dependent Care FSA. We ended up not using the FSA and just took the tax credit instead, which worked out better for us anyway since we have 2 kids and high childcare costs. Have you compared whether the FSA or the tax credit would be better in your situation? Sometimes the tax credit can be more beneficial, especially if your spouse might have little/no income.

I went through this exact situation when my husband started his consulting business in 2022. The key thing I learned is that the IRS doesn't require a minimum profit amount for your spouse to be considered "gainfully employed" for Dependent Care FSA purposes. What matters is that they have a legitimate business with profit intent. Even if your spouse shows a loss in 2023 due to startup costs, as long as they're genuinely operating a business (keeping records, spending time on it, marketing, etc.), they qualify as self-employed. However, your FSA contribution limit will be capped at their net earnings for the year. One thing to consider: if your spouse expects to have minimal or negative income in the year you want to use the FSA, you might want to compare the FSA benefit against taking the Child and Dependent Care Credit instead. The credit doesn't have the same earned income limitation and might be more beneficial in your situation. Also, make sure your spouse keeps detailed business records - receipts, time logs, business plan, etc. This documentation will be crucial if the IRS ever questions whether it's a legitimate business versus a hobby. Good luck with the new business venture!