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Are there withholding taxes deducted to a daycare provider's pay using a Flexible Savings Account?

• This is a question for a CPA or professional tax advisor. My employer has a Flexible Spending Account for Dependent daycare providers. If I use the pretax dollars and pay the independent private daycare provider either by check or cash (lets say $200 per week), I can submit a claim to United Healthcare to get reimbursed for this same amount. Basically the expense is a wash or nets to zero each week. Some private daycare providers prefer cash and may not report this income on their tax returns as it is so little. The question are: 1.) would I then need to indicate any of these payments on my own income tax returns and 2.) are the weekly payments to the daycare provider subject to any type of income withholding taxes? If so, who is responsible to report her taxes? Me or her?

• Answer:

  Even if you use a pretax plan, you must file a Form 2441 with your tax return showing to whom the payments were made. The payments made to the daycare provider would be subject to income taxes but that would be the day care provider's responsibility.