Why is back-up care taxable now?
Because Back-Up Care is provided at a cost less than the market rate for these services, the difference between the market rate and the benefit user’s cost is treated by the IRS as additional income for employees and nonqualified scholarship students that are a NRA.
Up to now, because the U.S. President had enacted a federal state of emergency due to the COVID Pandemic, the Stafford Act enabled the Back-Up Care Program to be treated as non-taxable, as it qualified as disaster relief during this period.
However, the federal state of emergency and the Stafford Act ended on May 11, 2023; therefore, the employee or NRA student who uses the Back-Up Care Program will be required to pay taxes on the fringe benefit corresponding to the care used.
How are students affected?
For students using the program, UCSF is not required to withhold taxes or report the amount to the IRS. UCSF will provide a year-end statement of the benefit to the student.
What are the Bright Horizons Back-Up Care Program Tax Implications?
This program provides UCSF Faculty, Residents and Clinical Fellows ("benefit users") with in-home and center-based dependent care at a cost that is less than the market rate for these services. The IRS considers the difference between the Fair Market Value (FMV) and the benefit user’s cost as additional income and is subject to taxation.
Starting May 12, 2023, employees who use the program are required to pay taxes on the fringe benefit corresponding to the care they use. Imputed income will be reflected two months following the service usage. For example, if care is secured in October, imputed income will be reflected in December’s pay statement to the employee.
How is Imputed Income calculated?
The following examples illustrate how the imputed income is calculated if a UCSF benefit user uses the program:
- One day of center-based care ( can be exchanged for camps or tutoring)
o UCSF FMV cost of care = $117*
o Benefit user co-pay = $30
o The imputed income = $87, which is the difference of $117 minus $30
- In home care for 8 hours:
o UCSF FMV cost of care = $226*
o Benefit user co-pay= $80 ($10 x 8 hrs. = $80)
o The imputed income = $146, which is the difference of $226 minus $80
*These Fair Market Values are effective January 1, 2025 and apply to care used on or after January 1, 2025.
How is Imputed Income taxed and deducted?
The imputed income is reported to the IRS as Other Income and is subject to the following taxes (deducted from the employee’s paycheck under the FMV earn code):
- Federal income tax
- State income tax
- OASDI: 6.2% with $160,200 income limit
- Medicare: 1.45%
When are taxes deducted for imputed income?
Taxes will be deducted 2 months after the service was utilized for employees.
