@rjs
Yes, self-employment income is considered earned income, or income earned from working, and satisfies the requirement for the dependent care FSA.
@TJ109
The maximum FSA that you can use is $5000, or the actual cost of dependent care, or 92% of your wife’s net earnings from self-employment, which ever is least.
Your wife has to take all legitimate business expense deductions, such as mileage on her car. Then, due to a quirk in how self-employment tax is calculated, the amount that is considered “earned income” for purposes of the dependent care credit is 92% of her net self-employment income after expenses.
If, at the end of the year, your FSA reimbursements are more than your wife’s net self-employment earnings, the uncovered portion of the FSA is added back to your taxable income, but there is no additional penalty.
