We are often asked whether providing childcare to employees will result in a taxable benefit to the employees. As with many taxation issues the answer is not straightforward.
Employer Provided Childcare
Interestingly enough, there is no taxable benefit in the hands of the employee in cases where:
- the employer establishes an in-house childcare facility or leases space to provide a childcare facility off premises,
- the employer pays for all operating expenses of that facility and
- the facility is available to all employees either free of charge or for a minimal fee.
The childcare facility must be available to all employees and not just to a group such as management and, furthermore, all parents using the centre must be charged the same discounted fees.
Workplace childcare centres often result in significant costs to employers. Even though these costs are deductible from business income the employer costs are often perceived to exceed the benefits of providing subsidized workplace childcare. Consequently, employer subsidized workplace childcare centres tend to be few and far between and the generous tax provisions available to employees are consequently rarely available.
Employer Subsidized Childcare
Amounts paid by employers directly to an employee to defray childcare costs incurred by the employee will result in a taxable benefit to him or her. For example, if an employee receives $10/day from an employer to help defray the $30/day cost of toddler care then the $10/day will be taxed in the hands of the employee. The full cost of care paid for by the employee of $30/day is, however, eligible for the childcare expense deduction noted in the article “Deducting Childcare Expenses”.
It is important to note that from a cash standpoint employees are always better off having employers defray childcare expenses to whatever extent possible. For example, an employee receiving a $10/day taxable benefit could have their childcare cash outlay reduced by $6/day ($10 received from the employer less additional tax payable of $4). This assumes the allowance does not result in a reduction in their base pay. Employees not receiving the taxable allowance will have to come up with an additional $6/day out of their own pocket.
From the employer’s standpoint the full amount of any childcare allowance should be deductible as an employment expense against business income for tax purposes.
Childcare provided to centre staff
Some centres provide either free or discounted childcare to centre staff who have children. There are a number of compelling psychological advantages to staff for having their children looked after at their place of work.
However, the childcare centre must factor a staff discount policy into its fee assumptions when preparing its monthly cash flow forecast. Several staff might take advantage of this policy at once thereby significantly reducing fee revenue.
Discounts and/or free childcare will result in a taxable benefit to the employee equal to the difference between normal fees charged by the centre and amounts actually paid by the staff. Cash flow advantages are similar to those noted above.
Deductibility of employer subsidized fees
Please note that childcare expenses are only eligible for the childcare expense deduction to the extent that they have been paid by the taxpayer. If an employer pays a subsidy directly to a centre then the employee may only deduct the amount of the fees they actually pay to the centre. For example, if stated pre-schooler fees are $25/day and because of an employer subsidy an employee only has to pay $15/day then only the $15/day is eligible to be deducted as a childcare expense by the employee. On the other hand, if an employee were to pay the full $25/day to the childcare centre and then be reimbursed $10/day by the employer then the employee would be able to deduct the full $25/day as a childcare expense up to the maximum allowed. Note that in both cases the employee will have to include the $10/day subsidy in taxable income.
In summary, employees are almost always better off having their employer either fully pay or partly defray the costs of their childcare. A tax deduction to the employee is only available for amounts paid in the year to the childcare provider. Consequently, employees should arrange to be reimbursed personally by the employer for any cost defrayment.