@Anonymous wrote:
I just wanted to make sure if I understood correctly.
This is my case:
I am full time employed and contributing Dependent Care FSA for $3000 per year. We do married filing jointly.
My spouse lost her job but actively looking for the new opportunity. While she is looking, she began working as part time tutor -- so I guess she is self-employed. I expect her earn around $2000 by end of this year.
In this case, because her expected income is lower ($2000) than my contribution ($3000), the cost to day care facility will be non-taxable for $2000. Then, there is no penalty but last $1000 will be taxable. Am I understanding right?
Thank you!
Correct. You can draw the entire $3000 from the FSA to pay the center, if that's what your cost actually is. Then, if your spouse's earned income from working (W-2 wages plus self-employment income) is only $2000, the remaining $1000 will be added back to your taxable income, but without a penalty.
One other tweak, when someone is self-employed, their "earned income" for this type of calculation is their net income after expenses minus half their SE tax. This is to create an equivalence with W-2 workers who pay social security and medicare tax. So if her net income is $2000, the amount eligible for the FSA will actually be $1847.
