Dependent care assistance explained.

What the exclusion covers

The exclusion applies to household and dependent care services you directly or indirectly pay for or provide to an employee under a written dependent care assistance program that covers only your employees. The services must be for a qualifying person’s care and must be provided to allow the employee to work. The publication says these requirements are basically the same as the tests the employee would have to meet to claim the dependent care credit if the employee paid for the services, and refers to “Can You Claim the Credit?” in Pub. 503.

A dependent care FSA offered through a cafeteria plan is one common way to deliver the benefit. Dependent care assistance is also one of the qualified benefits a cafeteria plan may include; see the cafeteria plan page. Benefits provided directly also count, as the on-site care in the publication’s example shows.

The 2026 dollar limit and the earned income cap

You can exclude the value of benefits you provide under a DCAP from the employee’s wages if you reasonably believe the employee can exclude the benefits from gross income. The publication states that an employee can generally exclude from gross income up to $7,500 of benefits received under a DCAP each year, or $3,750 for a married employee filing a separate return. Table 2-1 repeats the same figures.

The exclusion cannot be more than the smaller of the earned income of the employee or the employee’s spouse. Special rules determine the earned income of a spouse who is a student or is unable to care for themselves, and the publication points to Pub. 503 for the earned income limit. Employees who may also claim the credit should compare the two; the site’s dependent care FSA vs child care credit tool does that comparison.

Who counts as an employee

For this exclusion the publication treats as employees a current employee, a leased employee who has provided substantially full-time services for at least a year under your primary direction or control, yourself if you are a sole proprietor, and a partner who performs services for a partnership.

Highly compensated employees

You cannot exclude dependent care assistance from the wages of a highly compensated employee unless the benefits provided under the program do not favor highly compensated employees and the program meets the requirements of section 129(d) of the Internal Revenue Code. For 2026 a highly compensated employee is one who was a 5% owner at any time during the year or the preceding year, or who received more than $160,000 in pay for the preceding year; you can ignore the pay test if the employee was not also in the top 20% of employees ranked by pay for the preceding year.

Reporting on Form W-2

Report the value of all dependent care assistance you provide under a DCAP in box 10 of the employee’s Form W-2. Include any amounts you cannot exclude in boxes 1, 3 and 5. The publication stresses that box 10 gets both the nontaxable portion (up to $7,500) and any assistance above that amount that is taxable to the employee. The site’s W-2 box 12 code lookup covers the neighbouring box for other benefits.

The publication’s worked example

Oak Co. provides a dependent care assistance FSA through a cafeteria plan and also provides occasional on-site dependent care at no cost. Emily, an employee, had $7,000 deducted from her pay for the dependent care FSA, and she used the on-site care several times, with a fair market value of $700. Emily’s Form W-2 should report $7,700 of dependent care assistance in box 10 ($7,000 FSA plus $700 on-site care). Boxes 1, 3 and 5 should include $200, the amount over the nontaxable $7,500, and applicable taxes should be withheld on that amount.

Notice two points. The FSA salary reduction and the employer-provided care are added together against the same limit. And the box 10 total is not reduced by the taxable excess: it reports everything, while the wage boxes pick up only the part that is over the limit.

Employment tax treatment and cafeteria plan rules

Table 2-1 shows dependent care assistance as exempt from income tax withholding, social security and Medicare, and FUTA, up to the limits, with a footnote that the exemption does not apply to certain highly compensated employees under a program that favors them.

When the benefit runs through a cafeteria plan, the plan’s own tests also apply. If the plan favors highly compensated employees as to eligibility to participate, contributions or benefits, you must include in their wages the value of the taxable benefits they could have selected. If it favors key employees, meaning more than 25% of the total nontaxable benefits under the plan go to key employees, the same inclusion applies to them. A plan maintained under a collective bargaining agreement does not favor either group. For a 2% shareholder of an S corporation, the publication says not to treat the shareholder as an employee for cafeteria plan purposes.

Pub 15-B fringe benefits at a glance

Other pages in this set

De Minimis Benefits, Achievement Awards, Educational Assistance ($5,250), Adoption Assistance, Meals on Business Premises, No-Additional-Cost Services, Cents-per-Mile Valuation Rule, Cafeteria Plan, Working Condition Fringe, Lodging on Business Premises.

Sources

• IRS Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits: section 2, Dependent Care Assistance; Table 2-1; section 4 reporting. Page last reviewed April 30, 2026. Read November 2, 2026.

Every dollar figure on this page is a 2026 figure from the publication unless a different year is stated. The IRS can change a publication at any time, and the publication, your plan documents and a payroll professional control over this page. This page restates the publication and does not extend it to facts it does not address.