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A church offers a day school for nursery to preschoolers, in which our eldest child (3) is enrolled, (and we pay totally out of pocket as my wife is currently a full-time mom.

My wife is considering going back to work, and one of the options is to work as a care provider for this same day school as well as in the nursery during services/special church activities.

Would our eldest child's day school tuition be FSA-eligible if my wife worked for the same school?
I know there's a rule forbidding FSA payments to a caregiver that can be claimed as a dependent (paying a spouse, older child or a live-in grandparent to babysit during the day), but what happens when there's a corporate entity (in this case a religious nonprofit) between the money we pay and the money my wife gets?

  • Just to be clear, this isn't a co-op, right? It's a daycare that she would be happening to work for (and, perhaps getting a discount, but not directly trading her work for care)? – Joe Oct 26 '15 at 19:36
  • AFAIK that's not the case, this isn't just a group of moms trading off babysitting for a MDO program; the church would hire her, part-time, as an attendant/teacher for whomever comes through the door with the required dues, whether her own kids can/do attend or not. – KeithS Oct 26 '15 at 19:49
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I don't think there is any reason you couldn't use a dependent care FSA (or claim the child/dependent care tax credit, though the FSA is by far the superior option of course for one child) in this situation. As long as your wife is an employee of a corporation (even if it is a nonprofit), you're sufficiently distant such that it's not the situation the IRS excepts (someone you could claim as a dependent providing care).

Further, there's no reason the rule should be interpreted to exclude the class of people you're discussing (working parents who choose to work at a daycare); they're still working for a living, and thus should be equal to any other recipient of the credit.

  • I didn't see any particular evidence of this unfortunately in terms of rules addressing this or other references (hence why I held of posting, hoping one of our tax experts would comment). I suspect it's just one of those 'obvious' things that's not covered explicitly ... – Joe Oct 28 '15 at 1:21

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