Tax Advantages of Hosting an Au Pair - What Benefits Can I Claim?

Thanks so much for the helpful info! Just to make sure I understand correctly - even though I'm paying the au pair a weekly stipend, I don't technically need to set up payroll because they're exempt from FICA taxes? What about income tax withholding - do I need to handle that or is the au pair responsible for their own income tax filing? Also, do you know what the maximum amount I can claim for the Child and Dependent Care Credit? We're looking at around $20,000 annual cost including stipend, fees, room and board value, etc.

You're right that you don't need to set up traditional payroll with FICA taxes. However, the au pair is still earning income that's subject to income tax. Generally, au pairs are responsible for filing their own tax returns and paying any income tax due. You don't need to withhold income tax from their stipend. For the Child and Dependent Care Credit, there's a maximum of $3,000 in expenses per child ($6,000 total for two or more children) that can be used to calculate the credit. The actual credit percentage varies based on your income, ranging from 20% to 35% of qualifying expenses. So with two kids, you could potentially claim up to $6,000 in expenses, resulting in a credit between $1,200 and $2,100 depending on your income level.

That sounds interesting, but does it handle the specific case of au pairs? My tax guy last year insisted I needed to do quarterly filings for my au pair which seemed wrong based on everything I'd read about the J-1 visa exemptions.

I'm wondering if this works for someone who already has an au pair? I've been hosting for 6 months and honestly haven't kept the best records. Would this help me figure out what I can still claim properly without raising audit flags?

The system definitely handles au pairs specifically - it's actually one of the examples they highlight when explaining their service. They clarified for me that with J-1 visa au pairs, you don't need to do quarterly filings for FICA taxes because they're exempt. Your tax preparer was likely confusing au pairs with regular nannies or household employees. For someone already hosting, it would still be very helpful. You can upload whatever documentation you have, and the system will analyze what you have and tell you what else you need to gather. It specifically flags items that might trigger audit concerns and explains how to properly document things even if you didn't keep perfect records from the start. They have a section about "catch-up documentation" that was super helpful when I realized I hadn't tracked some expenses correctly.

How does this actually work? Do they just call the IRS for you? Couldn't I just do that myself and save the money?

Seems kinda sketchy to me. The IRS wouldn't just let some third party service jump the queue. I've been trying to reach them about my au pair situation for weeks and always get disconnected after an hour on hold.

It's not actually someone calling on your behalf. What they do is use their system to navigate the IRS phone tree and wait on hold instead of you. When they finally get a human IRS agent on the line, they connect that call directly to your phone. So you're the one actually talking to the IRS, not some intermediary. I had the same skepticism initially! But it works because they're not jumping any queue - they're just taking over the painful waiting part. Their system can dial hundreds of times if needed to get through during high-volume periods when the IRS phone system is rejecting calls. Once I got connected, the agent answered all my specific questions about au pair tax documentation requirements and confirmed I was handling the exemptions correctly.

Wait, so the room and board doesn't count towards the dependent care credit? That's a significant expense! Is there any way to include that value since it's required as part of hosting an au pair?

Correct - the room and board value doesn't count toward your dependent care credit calculation. Only the direct payments like stipend and program fees qualify. The IRS views the room and board as a non-taxable benefit to the au pair rather than a direct childcare expense for you. It's frustrating because it's definitely a real cost of the program, but that's how the tax code treats it. Focus on documenting the weekly stipend, program fees, educational costs, and any other direct payments you make as part of the au pair program - those are the expenses that will count toward your $3,000 per child limit ($6,000 total).

My tax preparer told me the opposite about FSA funds vs. the tax credit. Now I'm confused. Can anyone clarify how this works if you have both?

You can use both FSA funds and claim the dependent care tax credit, but not for the same expenses - that would be double-dipping which the IRS doesn't allow. Here's how it works: If you have $6,000 in total au pair expenses and use $2,000 from your dependent care FSA, you can still claim the remaining $4,000 for the tax credit calculation. The FSA money is already tax-free, so you get that benefit upfront. Then the remaining expenses can qualify for the 20-35% tax credit. Your tax preparer might have been thinking of the old rules or got confused about the interaction. The key is proper documentation - keep receipts showing which expenses were paid with FSA funds versus out-of-pocket payments. This way you can maximize both benefits without any compliance issues.

This is incredibly helpful - thank you for sharing your real-world experience! The point about tracking childcare vs. housework hours is something I hadn't thought about. Do you have a specific breakdown or ratio that you use? I know au pairs are supposed to do "light housework" related to the children, but I'm wondering how strict the IRS is about distinguishing between childcare and general household tasks. Also, when you mention needing the SSN/ITIN early - did your au pair have any trouble getting one? I've heard mixed things about how quickly that process works for J-1 visa holders. The $1,800 annual savings definitely makes this program more financially attractive. Combined with the childcare benefits, it seems like a win-win situation if you can navigate the tax requirements properly.

For the childcare vs. housework tracking, I generally use about an 80/20 split since most of what our au pair does relates directly to the kids - getting them ready for school, picking them up, helping with homework, meal prep for the children, and tidying their rooms/play areas. The remaining 20% might be general household tasks like loading the dishwasher or doing a load of laundry that includes everyone's clothes. I don't think the IRS is super strict about this as long as you're reasonable and can justify that the majority of their time is legitimate childcare. The key is being able to show that you're not trying to claim credit for a general housekeeper - the focus should clearly be on child-related care and activities. Regarding the SSN/ITIN - we've had mixed experiences. Our first au pair got her SSN within about 3 weeks of arrival, but our second one took nearly 2 months due to Social Security office delays. I'd recommend having your au pair apply as soon as possible after arrival and getting a receipt from the SSA office. You can still file your taxes on time and include the receipt if the actual SSN hasn't arrived yet - just make sure to follow up and amend if needed. The financial benefits really do help justify the program costs, especially when you factor in the peace of mind and cultural exchange benefits for the whole family!