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This question relates to a Dependent Care Flexible Spending Account (FSA) account in the USA. I'm aware that contributions to an FSA are not available to self employed persons, and not deductible if one spouse is 'stay at home'.

What rules apply to a working spouse with an employer FSA, plus a self-employed spouse? And if money is put aside in an FSA, but the final taxable income of either spouse is too low, are there penalties or forfeit funds? Self employed persons may run a profit or loss in a given year, even if working full time.

Reference documents include http://www.irs.gov/publications/p969/ar02.html and http://www.irs.gov/publications/p502/

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    You asked about the Dependent Care FSA, but both links focus on the medical FSA. How can the taxable income be 'too low'? As long as you use the money, it's pretax.
    – JTP - Apologise to Monica ♦
    Commented Mar 27, 2014 at 9:57
  • Dependent care is a type of FSA, and thus the links. "Too low" means the dependent care worksheet phases out the benefits (the idea is that if one spouse does not work, they should be taking care of the kids).
    – Bryce
    Commented Mar 27, 2014 at 16:39
  • Understood. My understanding is that for second spouse, it's not about money, but time. Spouse can be a student or working, and can only use FSA to cover those hours.
    – JTP - Apologise to Monica ♦
    Commented Mar 27, 2014 at 16:55
  • I'm seeking the relevant IRS guidance. There's an 'income test' and statement about both school and 'looking for work', but nothing about typical self-employment issues such as the difference between gross receipts and net profit.
    – Bryce
    Commented Mar 27, 2014 at 17:02

1 Answer 1

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  1. The FSA money is still spendable, but the deduction may be phased out unless both incomes are high enough.
  2. The self-employed spouse can use the Publication 334 "optional method" in case of a net loss:

Optional SE income calculation, IRS Publication 334

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