So let's start here: A Flexible Spending Account (FSA) is an employer-sponsored benefit that allows employees to set aside pre-tax money from their paycheck to pay for certain expenses, including dependent care and medical. To be eligible for an FSA for dependent care these test must all be met:
1. The employee's workplace must offer a DCFSA as part of its employee benefits package.
2. The employee can sign up during open enrollment or after a qualifying life event (QLE).
3 The employee and their spouse (if applicable) must be employed, or the spouse must be a full-time student or looking for work.
4. The employee's dependents must live with them for more than half the year.
So since your spouse is is now self-employed you would be eligible for the FSA and/or the Dependent Care Credit. An FSA can be used for the first $5,000 of expenses and the Dependent Care Credit can be used for up to $3,000 per eligible dependent. You do not pay FICA taxes, income taxes and state taxes on the FSA, so often you come out ahead using an FSA.
Thank you so much for your question @psshah_9062
Be well and safe!
Marc T.
Turbo Tax Expert
27 Years of Experience Helping Clients
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