1. He can pay to watch your own children but he can't use that to claim the dependent care credit or use an FSA. The credit is disallowed when the caregiver is a close relative.
2. If you are not married, and these are his children but not yours, then yes he can pay you to provide day care and claim the credit or use an FSA. But, this means that:
•You are his household employee. He has to withhold or pay household employer taxes on his tax return (basically, social security and medicare tax) and he has to issue you a W-2.
•You have to file a tax return to report the income. If this is your only income, you won't owe tax unless the amount is more than $12,400, but you should file.
•He can't claim you as a dependent if your taxable income is more than $4050.
•If you get married at any time in the future, then his children become yours for tax purposes for the entire year. Even if you marry on December 31, then the children are your children and any salary he paid you during the other 364 days would become ineligible for the FSA or dependent care credit.
