Tax Implications for the Back-up Care Program

UCSC’s Back-up Care Program helps all UCSC students and employees access subsidized in-home and center-based dependent care. However, since the care is provided at a cost less than the market rate for these services, the difference between the market rate and the benefit user’s cost is treated by the IRS as additional income (also known as imputed income for employees or a nonqualified scholarship for students) and is taxable.

Up to now, because the U.S. President had enacted a federal state of emergency due to the COVID Pandemic, the Stafford Act enabled the Back-up Care Program to be treated as non-taxable, as it qualified as disaster relief during this period 

However, the federal state of emergency and the Stafford Act ended on May 11, 2023; therefore, the employee or student who uses the Back-up Care Program will be required to pay taxes on the imputed income or nonqualified scholarship corresponding to the hours of care used. 

Imputed Income and Nonqualified Scholarship Calculations

Imputed Income Calculations 

Imputed income = UC Santa Cruz’s cost of the care minus the employee's co-payment.

The following example illustrates how the imputed income is calculated if a UCSC employee uses 5 hours of in-home care back-up care services:*

• UC Santa Cruz’s cost of care = $25.00 x 5 hours = $125.00
• Cost of service to an employee for in-home care = $4 an hour co-pay x 5 hours = $20 
• The imputed income is $105.00, which is the difference of $125.00 minus $20

*For a student employee, the cost of service for in-home care = $2 an hour co-pay x 5 hours = $10, and the imputed income is $115.00.

Employee Taxes on Imputed Income and 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

Nonqualified Scholarship Calculation

Nonqualified Scholarship = UC Santa Cruz’s cost of the care minus the student’s co-payment.

The following example illustrates how the nonqualified scholarship is calculated if a UCSC student who is not an employee uses 5 hours of in-home care back-up care services:

• UCSC’s cost of care = $25.00 x 5 hours = $125.00
• Cost of service to a student for in-home care = $2 an hour co-pay x 5 hours = $10
• The nonqualified scholarship is $115.00, which is the difference of $125.00 minus $10

This will be a nonqualified scholarship calculation for self reporting.

For questions regarding tax implications please email: payhelp@ucsc.edu

All other questions should be directed to Bright Horizons at 877-BH-CARES.