How a Dependent Care FSA Works for Daycare

Dependent care FSAs let working parents pay for daycare with part of their salary before income and payroll taxes are taken out. You choose the amount once a year through your employer, then pay your daycare as usual and claim the money back after the care has happened. How much it saves depends on your tax bracket, the limit your employer’s plan allows, and whether the child care tax credit would suit your family better.

The account usually turns up during open enrollment, on the same benefits screen as your health plan: a box labeled ‘dependent care FSA‘ and an empty field asking how much you’d like to set aside for next year. If your child is in daycare, or will be soon, that box can save your family a couple of thousand dollars a year. The limit also went up for 2026, from $5,000 to $7,500, the first increase since 1986. Below, we explain how the account works, what daycare costs it covers, how much it saves a family in Illinois, and how to claim your tuition back week by week.

What is a dependent care FSA, exactly?

FSA stands for flexible spending account, and the dependent care version is a benefit you get through your employer. It lets you set aside part of your salary, before taxes, to pay for the care of children under 13 while you work. The money goes into the account from each paycheck, and you claim it back when you pay for daycare, preschool, before- and after-school care, or summer day camp.

Your enrollment screen may call it something else: DCFSA, dependent care spending account, dependent care reimbursement account, or dependent care assistance program (DCAP), which is the name the tax code uses in Section 129. They’re all the same account.

It isn’t the same thing as a health FSA, even though the two often sit next to each other on the enrollment form. Health FSAs pay for medical costs like copays and prescriptions, while the dependent care FSA only pays for care. Each has its own limit, and you sign up for each one separately. Some health FSAs let you carry leftover money into the next year, but a dependent care FSA doesn’t. The same account can also pay for the care of a spouse or another dependent who can’t look after themselves, but this guide sticks to children.

How a dependent care FSA works, step by step

The money you put in comes out of your pay before your employer works out federal income tax, Social Security and Medicare tax. You also skip Illinois income tax on that money. According to the Illinois Department of Revenue, Illinois works out your state tax starting from the income on your federal return, and the FSA money has already been taken out of that number. Skipping those taxes is where the savings come from.

1. Check that your employer offers one

You can only get a dependent care FSA through an employer’s benefits plan. Look for it on your benefits portal or ask your HR team. If your job doesn’t offer one, the child care tax credit we cover further down may still help.

2. Choose your amount during open enrollment 

This usually happens in the fall, for the plan year starting in January. You pick one amount for the whole year, up to your plan’s limit, and you’re generally held to it until the next open enrollment, unless something changes in your family or your childcare.

3. The money comes out of each paycheck 

Your employer splits the yearly amount across your paychecks. If you choose $7,500 and you’re paid every two weeks, that’s about $288 a paycheck.

4. Pay your daycare as usual

Nothing changes on the daycare side. You pay tuition the way you always do, and the center doesn’t need to sign up for anything or ‘accept’ the FSA.

5. Send in a claim once the care has happened

Log in to your account or your plan’s app, upload a receipt and enter the dates of care. According to the IRS, a care expense counts in the year the care is given, not when you pay for it, so you claim each week or month once it’s over.

6. Get the money back

The money is paid into your bank account or sent as a check, and some FSA accounts come with a debit card. You can only be paid back what’s already in the account, though, not your whole yearly amount, as FSAFEDS, the federal employees’ FSA program, explains. This means that in January you may be waiting on a few paychecks to catch up.

What’s the dependent care FSA limit for 2026?

Starting January 1st, 2026, a household can put up to $7,500 a year into a dependent care FSA, or $3,750 for each parent if you’re married and file separate tax returns. The change came from the federal tax law signed on July 4, 2025, known as the One Big Beautiful Bill Act, which raised the limit in Section 129 for tax years starting after December 31, 2025. The IRS lists the new figure in its 2026 guide for employers.

The limit is per household, not per child, so two children in daycare still means $7,500 in total. It’s shared between parents, too. If you both have an account at work, the two amounts together can’t go over the household limit on a joint tax return. So, agree on who puts in what before you both enroll.

Your employer also has to choose to offer the higher amount. Plans had to be updated in writing to allow $7,500, so check the figure on your own enrollment screen. If your employer’s limit is still $5,000, that’s the most you can put in through that job.

Two smaller rules can lower your personal limit. The account can’t pay out more than the earnings of the lower-paid parent for the year, which only comes into play if one of you earns less than $7,500, for example by working part time. Employers also have to make sure their plan doesn’t favor their highest-paid staff, so some of them set a lower limit for those employees. Ask your HR team if you’re not sure whether that applies to you.

How much a dependent care FSA saves

The money you put in the account isn’t taxed, so you keep more of your pay. It skips federal income tax, Social Security and Medicare tax, and Illinois’s flat 4.95% income tax. As a rough guide, you save about a quarter to a little over a third of whatever you put in, and families with higher incomes usually save more.

For example, a couple earning $160,000 between them who put the full $7,500 in the account would keep about $2,595 more of their pay that year. If you’re a single parent, or if one of you earns a very high salary, your savings will be a little different, and a tax preparer can work out your exact number. These figures are for 2026 and use the tax rates for married couples published by the IRS.

For full-time daycare, you’ll spend $7,500 quickly. In Illinois, the average cost of child care is $19,807 a year, according to the First Five Years Fund, more than twice the limit. You can see what families pay in our breakdown of daycare costs in Illinois. Keep the use-it-or-lose-it rule in mind, which we explain below, and choose an amount you’re sure you’ll spend.

What a dependent care FSA covers

The account can pay for a cost when two things are true: it’s for looking after a child under 13, and you’re paying it so you can work or look for work, along with your spouse if you’re married.

Preschool and pre-K count because the IRS treats programs below the level of kindergarten as care. Kindergarten tuition doesn’t count, but before- and after-school care for a kindergartner does. Paying a nanny counts as well, which is one more thing to weigh up in our nanny vs. daycare comparison.

Food on its own isn’t categorized as care, but small amounts that are ‘incidental to and can’t be separated from the cost of caring’ for your child are included, so meals that come with the daycare fee and aren’t billed separately generally go in with the cost of care.

Daycare centers that look after more than six children only count if they follow state and local rules. In Illinois, child care centers are licensed by the Illinois Department of Early Childhood, which took over licensing on July 1st, 2026.

Who can use a dependent care FSA?

You can use the account for daycare when all of these are true:

• Your child is under 13. Care after their 13th birthday doesn’t count.
• You’re working or looking for work. Unpaid volunteer work doesn’t count.
• If you’re married, your spouse is also working or looking for work, is a full-time student or isn’t able to care for themselves.

If one parent stays home full time, the family generally can’t use the account. The exception is a parent who’s a full-time student, or who isn’t physically or mentally able to care for themselves. Then you can still use the account, but with a lower limit: $3,000 a year if you have one child in care, or $6,000 for two or more. If they’re a student for only part of the year, the limit is still lower, so ask your HR team for the exact figure.

There’s no income limit for opening an account, apart from the lower limit some employers set for their highest-paid staff.

Paying daycare tuition with a dependent care FSA

At LadyBug & Friends, tuition is due on the Friday before each week of care. With a dependent care FSA, you’d pay us on Friday as usual, then claim that week once it’s over. Check your FSA account website or app, or ask your HR team whether you can set up a repeating claim for the same weekly amount. That way you’re not uploading a receipt every Monday.

When you file your taxes, you’ll report the account on Form 2441, which asks for each care provider’s name, address and taxpayer identification number, and you may need the same details when you send in claims. Ask the center’s office for a receipt that shows the dates of care, the amount paid and the center’s tax ID number. The IRS made Form W-10 for collecting exactly these details from a provider.

Our one-time $125 enrollment fee and our $150 waitlist fee are both fees you pay to get care, and the IRS counts fees like these. Fees or deposits for care that never starts don’t count, though, so claim them after your child’s first week with us. Some FSA accounts handle registration fees differently, so check your account’s rules or ask your HR team before you send that claim.

We charge for your child’s place whether or not they come in that day, including during vacations and sick days. Those weeks still count as long as your own time away from work is short. Under IRS rules, an absence of up to two weeks in a row, like a vacation or a minor illness, is a short, temporary absence, so you don’t have to take that week out of your claim.

Deadlines, grace periods, and changing your amount

Money you don’t claim by your plan’s deadline is unfortunately lost. This is the ‘use it or lose it’ rule, and it’s the main downside of the account.

You may get extra time in two ways. Some employers allow a grace period of up to 2½ months after the plan year ends, when you can still spend the money on new care. Many also allow a few months, for example 90 days, to send in claims for care from the year before. Neither one is guaranteed, so look up your plan’s dates when you enroll.

Your amount is generally fixed for the year, but the tax rules allow changes after certain events: a new baby, a new job or a change in hours for you or your spouse, switching daycares, or your daycare changing its price. Price changes only count when the provider isn’t a relative. Each employer sets its own rules on which of these it accepts and how long you have to ask, often 30 days.

Dependent care FSA or the child care tax credit?

There’s also a federal tax credit for childcare costs, the Child and Dependent Care Credit. You can’t use the FSA and the credit for the same costs, and if you put the full $7,500 in an FSA, there’s nothing left to claim the credit on, under Section 21 of the tax code.

Which one saves you more depends on your income and how many children you have in care. For example, a married couple earning $160,000 with two children in daycare saves about $2,595 with the FSA, against $1,920 at most from the credit. A couple earning $100,000 with two children could come out slightly ahead with the credit.

Before you choose your FSA amount, ask a tax preparer which one works better for your family.

If you’re choosing your FSA amount this fall, start with the weekly tuition. LadyBug & Friends cares for children from 6 weeks to 6 years, 7am to 6pm, Monday to Friday, at nine centers: West Loop, Lakeview, Lincoln Square, North Park, Irving Park, Edgewater, Touhy & Harlem in Chicago, plus Elmhurst and Mount Prospect in the suburbs. When you book a tour, ask us for the weekly rate for your child’s age to plan with.

Frequently asked questions

Can I use a dependent care FSA for daycare?

Yes. Daycare tuition for a child under 13 counts, as long as you’re paying it so you, and your spouse if you’re married, can work or look for work. Daycare centers that look after more than six children also have to follow state and local rules, which licensed centers do.

Is the dependent care FSA limit per child or per family?

Per household. In 2026 the limit is $7,500 a year whether you have one child in daycare or three, or $3,750 for each parent if you’re married and file separately. If both parents have an account, the two together can’t go over the household limit.

Does a dependent care FSA roll over?

No. Money left in the account at the end of the plan year is lost. Some employers allow a grace period of up to 2½ months to spend it on new care, and extra time to send in claims for the year before.

Can I use a dependent care FSA for preschool or pre-K?

Yes. The IRS counts preschool, pre-K and similar programs below kindergarten as care. Kindergarten tuition doesn’t count, but before- and after-school care for a kindergartner does.

Can I use a dependent care FSA for summer camp?

Day camp can count, even one that focuses on a single activity like soccer or art. Overnight camp doesn’t.

Can I use a dependent care FSA if my spouse stays home?

Generally no, because the care has to be what lets both of you work. The exception is a spouse who’s a full-time student or unable to care for themselves, in which case a lower limit applies.

Can I change my dependent care FSA amount during the year?

Only after certain events, like the birth of a baby, a job change, switching daycares or a change in what your daycare charges. Each employer sets its own rules on which events it accepts and how long you have to ask, often 30 days.