Definition
An employer benefit that lets you pay for eligible care with pre-tax payroll dollars: daycare, preschool, after-school programs, summer day camp, or adult day care that lets you (and a spouse, if married) work. Funds are use-it-or-lose-it within the plan year, and the IRS caps annual contributions.
Why it matters
Paying for childcare with pre-tax dollars is an immediate discount at your marginal tax rate plus payroll tax. The catch is forecasting: money left unspent at the deadline is forfeited.
Example
A parent runs $4,000 of daycare bills through a dependent care FSA. At a combined 30% marginal rate (federal, state, and payroll tax), that is about $1,200 saved, provided the family actually incurs the expenses before the deadline.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.