Can we use Dependent Care FSA through spouse's employer if I'm a 5% LLC Owner?

This is actually a common misunderstanding! Your tax accountant is referring to the rule for S-corporation owners with more than 2% ownership - they can't participate in their OWN company's cafeteria plans (including FSAs). However, this restriction doesn't apply to your situation for two important reasons. First, you're becoming an LLC member, not an S-corp owner. Second, and more importantly, the FSA is through your husband's employer where you have no ownership stake. The dependent care FSA is established through your husband's employment relationship with his company, and your business arrangements elsewhere don't affect his eligibility. Since he's the one participating in the FSA (not you), your LLC ownership status is irrelevant to this particular benefit. You can absolutely continue to contribute to the dependent care FSA through your husband's employer and still file jointly. Just make sure to keep good records of your childcare expenses for reimbursement.

After struggling with a similar situation last year, I discovered taxr.ai (https://taxr.ai) which really saved me when transitioning from employee to part-owner in my own business. My accountant also gave me conflicting information about benefit eligibility when my employment status changed, so I uploaded my operating agreement and the benefits documentation to taxr.ai and got clear guidance specific to my situation. The tool analyzed both documents and clarified that spouse employer benefits aren't affected by your business ownership status in a different company. It also highlighted some potential tax deductions I could take as a part-owner that my accountant hadn't mentioned. Might be worth checking out since you're navigating this ownership transition.

I was initially skeptical about taxr.ai but decided to try it for my multi-LLC situation. I uploaded my documents last month and was seriously impressed with the clarity it provided. Unlike my accountant who gave me generalized advice, the analysis broke down exactly how my 30% ownership in one LLC and 15% ownership in another affected different tax benefits. In my case, it confirmed I could still use my spouse's company HSA and dependent care benefits while receiving distributions from my businesses. It also flagged that one of my LLCs needed different tax treatment than the other due to the ownership percentage. Definitely worth the time for business owners navigating these complicated transitions.

If you need to contact the IRS directly about this FSA question, save yourself hours of frustration with https://claimyr.com - I used them last month when I had a similar benefit eligibility question that my accountant couldn't answer definitively. After trying to call the IRS for 3 days and never getting through, I used their service and got connected to an IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed that owner restrictions on FSAs only apply to the company where you have ownership. Since your husband's FSA is through his separate employer, your LLC ownership doesn't matter for that benefit. Having an official answer directly from the IRS gave me the confidence to move forward with my business plans without worrying about losing our family's tax advantages.

I was totally skeptical about Claimyr after seeing it mentioned here, but I was desperate after spending literally 6+ hours across multiple days trying to reach someone at the IRS about my business tax situation. I finally gave in and tried it last week, and I'm still shocked at how well it worked. Got connected to an IRS agent in about 25 minutes, and they actually gave me clear guidance on my LLC ownership and benefit eligibility questions. The agent confirmed exactly what others have said here - spouse employer benefits aren't affected by your ownership in a separate business. Saved me tons of stress and uncertainty, and the time savings alone was worth it. Never going back to calling the IRS directly again!

Just to add another perspective - I'm in a similar situation (7% owner in an LLC, spouse has benefits through their employer) and we've been using their dependent care FSA for 3 years with no issues. Our CPA confirmed this is completely fine since I have no ownership in my spouse's company. One thing to watch for though: make sure you understand how your LLC distributions will be taxed compared to your previous W-2 income. That transition has bigger tax implications than the FSA question. Depending on how your LLC is structured for tax purposes (partnership vs. S-corp election), you might need to make quarterly estimated tax payments since you won't have withholding on distributions.

Just a heads up - while everyone here is right about your husband's FSA eligibility not being affected by your LLC ownership, make sure you understand what happens with your healthcare coverage when you transition from W-2 to part-owner. If you're currently on your employer's health insurance plan, becoming an owner might change your eligibility depending on how the plan is structured. Some companies have different rules for owners vs. employees. You might need to switch to your husband's health plan during his next open enrollment period or look at marketplace options. Also, don't overlook the potential to deduct health insurance premiums as a business owner - that's a valuable deduction that can offset some of the increased self-employment taxes others mentioned.

I went through almost the exact same situation two years ago when I became a 6% owner in my consulting firm. Like you, I was worried about losing our dependent care FSA benefits, but my concerns were unfounded. The key distinction is that ownership restrictions for FSAs apply to the company where you have ownership, not to benefits obtained through a spouse's separate employer. Since your husband's FSA is through his company (where you have zero ownership), your new LLC ownership status is completely irrelevant to that benefit. One practical tip: when you transition to receiving distributions instead of W-2 wages, your household's tax situation will change significantly. You'll likely owe more in taxes due to self-employment taxes on your share of LLC profits. Consider increasing your dependent care FSA contribution to the maximum if you're not already doing so - it's one of the few tax advantages that actually becomes more valuable when you're paying higher effective tax rates as a business owner. Also, make sure your operating agreement clearly spells out how distributions will be handled and when. You'll want predictable cash flow for those quarterly estimated tax payments!

As someone who works in tax compliance, I can confirm what others have said - your LLC ownership won't affect your husband's dependent care FSA eligibility at all. The 2% owner restriction is specific to S-corporations and only applies when the owner is participating in their OWN company's cafeteria plan. However, I want to emphasize something that hasn't been mentioned enough: make sure you fully understand the tax implications of switching from W-2 to LLC distributions. Beyond the self-employment tax issue others discussed, you'll also lose certain employee benefits like unemployment insurance coverage. Also, depending on how your LLC is structured, you might have "guaranteed payments" instead of distributions if you're still working there regularly. Guaranteed payments are treated differently for tax purposes - they're subject to self-employment tax but they're also deductible to the LLC. Make sure your accountant explains the difference and how your specific arrangement will be classified. The FSA question is straightforward, but the overall tax transition deserves careful planning. Consider doing a tax projection for the full year to avoid any surprises at filing time.