The actual mechanism for this type of plan is an agreement to voluntarily reduce your salary in return for an employer-provided fringe benefit. These plans give you a choice of whether to receive cash wages or a benefit for dependent care. You are receiving a tax benefit because you are not paying taxes on the money that is set aside to pay for the dependent care. For more information refer to Publication 17, Your Federal Income Tax, Publication 503, Child and Dependent Care Expenses, or Tax Topic 602, Child and Dependent Care Credit.

You must complete Part III of Form 2441 (PDF), Child and Dependent Care Expenses, (or Form 1040A, Schedule 2 (PDF), Child and Dependent Care Expenses for Form 1040A Filers) to exclude the dependent care benefits from income even if you cannot claim the child and dependent care credit. Enter your total employer-provided dependent care benefits on the correct line (this amount should appear in Box 10 of your Form W-2) and your qualified expenses on the correct line. The last lines of Part III will determine whether you can also take the credit and the dollar limit on qualified expenses. Also complete Part I, Persons or Organizations Who Provided the Care. For more information, refer to the instructions for Form 2441 (PDF) Form 2441, Child and Dependent Care Expenses, Publication 503, Child and Dependent Care Expenses, or Tax Topic 602, Child and Dependent Care Credit.