Back Up Care Program Tax Implications

The Back Up Care Advantage Program provides benefits-eligible academic employees, also referred to here as employees, with in home and center-based dependent care at a cost that is less than the market rate for these services. The difference between the market rate for the in home and center-based care and the employees’ cost is treated by the IRS as additional income to the employee, also known as imputed income, and is taxable.

The employee who has used the Back Up Care program is required to pay taxes on the imputed income corresponding to the hours of care used, and the employee’s department or school matches the employees’ tax contribution.

 

Imputed income calculations

Imputed income = the employer cost of the care minus the employee’s co-payment.

UC Berkeley’s cost of care is $44.32/hour for in-home care for up to three dependents, and $23.64/hour per dependent for center-based care.

Employee’s co-payment is charged at a rate of $4/hour for in-home care for up to three dependents, and $2/hour per child for center-based care.

The following example illustrates how the imputed income is calculated if the employee uses 10 hours of in-home back-up care services:

Employer cost of care = $44.32 x 10 hours = $443.20
Cost of service to employee = $4 an hour co-pay x 10 hours = $40

The imputed income is $403.20, which is the difference of $443.20 minus $40

Employee Taxes on Imputed income & how these taxes are deducted

The imputed income is reported to the IRS as Other Income and is subject to the following taxes which are deducted from the employee’s paycheck through the campus Central Payroll:

Medicare: 1.45% (or 2.35% if income over $200K) 
OASDI: 6.2% with $128,400 income limit
Federal income tax
State income tax

The Central Payroll also charges the OASDI and Medicare taxes to the employees’ department or school.

For questions regarding imputed income please email ofew@berkeley.edu. All other questions should be directed to Bright Horizons at 877-BH-Cares.