Is Cash Really King? The Role Of Cash In Childcare And Daycare

6 min readDec 15, 2021

Child care costs are a regular sticking point for new families. Based on recent studies, the majority of families spent over $10,000 on child care in 2020, and nearly all spend more than 10% of their household income on childcare. That can be higher than in-state college tuition!

The actual cost of childcare depends on a lot of factors, including where you live, how old your child is, and what kind of care you need. However, one thing stays the same: those ever-increasing bills need to be paid.

In an ever-digitizing world, it may surprise you to hear that you can still pay for childcare costs with cash. The question is: is it worth it?

How Do People Normally Pay For Childcare?

Low-income to middle-class families have a few different ways to find the funds for childcare. Some may even combine a few (or all) or the payment options, depending on their situation.

FSA Pre-Tax Tuition

Some companies allow their employees to allow some of their paycheck (pre-tax) towards FSA accounts for childcare. While the actual paycheck that hits their bank account is smaller, this can help families save money come tax time.

However, many have a “use it or lose it” policy. Some employees are losing their FSA money set aside from their paychecks by having it stuck in a dependency-care flexible spending account that they couldn’t employ during the COVID-19 pandemic.

Bank Transfer and eCheck

Whether you have a live-in caregiver or daycare facility, bank transfers and eChecks are becoming more accessible as a “cash online” type of payment. This option allows for funds to be transferred from anywhere with just the account and routing information. While the process is convenient, there may be some processing time to consider, which must be accounted for in order to avoid late fees or bounced payments.

Credit Card

Some childcare programs allow parents to pay for their services with credit cards. While this payment system is certainly convenient, it can come with some serious drawbacks as well.

For one, your one-on-one caregivers may not be able to accept credit cards. Some of your daycare facilities may not accept them either, either because they don’t have the means to do so, or the fees outweigh the benefits. Processing fees can be up to 3% per transaction, which adds up quickly with the skyrocketing cost of childcare.

That 3% may not seem like much at first, but over time, those fees can blow up your child care budget. The average annual cost of childcare is around $10,000; with a 3% processing fee, that’s $300 a year that can eat into a family’s already tight budget. What could you do with an extra $300 a year?

If you pay off your credit cards each month, then the potential rewards and cash back (or even those airline miles!) may be worth the processing fees for you. However, not paying your credit card off each month can quickly make this a bad decision for childcare costs, as this will lead to carrying debt from month to month.

Cash

For some parents, paying with cash or a check makes the most sense. It’s a fairly straightforward method of payment that can be used for any caregiver, whether it be your teenage babysitter or your daycare facility.

Paying cash seems easy at first, and it’s commonly used for paying one-on-one caregivers or in-house daycares. Some families even hire an au pair as the least expensive option and pay in cash. Others may seek out low-cost daycare options (like church-subsidized facilities) and pay in cash there.

Is It Worth Paying For Childcare In Cash?

The high costs of childcare make cash payments a difficult choice. Cash is still accepted in most situations, but as our society becomes more and more digitized, the benefits of cash payments don’t always outweigh the drawbacks.

Benefits To Using Cash For Childcare

There are some pros to paying for childcare in cash. Some of these main benefits include:

The caregiver gets the funds immediately, so neither party needs to worry about the payment bouncing or incurring late fees.
There are no processing fees (which can quickly add up to hundreds of extra dollars on top of the cost of childcare itself).
You can use cash for smaller-scale child care situations, such as babysitters and nannies.

Cons To Using Cash For Childcare

If you choose to use cash to pay for childcare, there are certainly benefits to doing so. However, cash also comes with its own disadvantages. Some of these limitations include:

Unlike card payments, there is no dispute protection for your cash payments. Once the cash leaves your hands, it becomes much harder — if not impossible — to reverse your payment.
If your cash is lost or stolen, that money is usually gone forever.
Paying in cash is more time-consuming. You need to withdraw cash from the bank or ATM, give the cash to your caregiver in person, make change (if the amount is not exact), and then wait for the caregiver to deposit that money into their own account.
Storing and transporting cash payments requires additional time and resources (such as a till). At best, this process is annoying. At worst, it can be dangerous, as practically anything can happen during transport to lose that cash (accidentally, or by robbery).
There is no automatic paper trail. When making cash payments, you need to make and store receipts on your own. This lack of records makes it more likely that you will be audited by the IRS (especially if you claim a tax credit).

You may also want to save up an emergency fund in cash that can be used towards childcare in hard times, like if one parent loses their job, or another large expense leaves your family low on other funds.

Can I Claim Tax Credits If I Pay For My Childcare In Cash?

Cash payments require meticulous bookkeeping in order to better prepare you for tax season. You can claim deductions or even tax credits for your paid-in-cash childcare costs, but you need to do it strategically.

First, you need to have detailed receipts for each transaction, even if you have to make them yourself. Have everything in writing, including who the payment is to, how much, and when it was paid.

There are specific parameters that need to be met in order for you to use these cash payments as childcare tax decisions. For one, you can’t pay your spouse or your older children and then use those payments for tax purposes.

You also need to be able to prove that each payment was used solely for childcare. Mileage, food costs, and other expenses aren’t eligible for these kinds of deductions. (However, if you include the costs of takeout in your babysitter’s overall rate, that can still apply).

As a final note, you will also need the SSN of your caregiver to include on your tax return.

An Ever-Changing Role

There is still a place for cash payments in the field of childcare, but today, it’s a matter of when. When considering using cash as your primary method of payment, make sure to account for the extra time, effort, and drawbacks that come with cash payments, especially when it comes to childcare.

And as always, keep an eye out for new resources that give you a central payment system for all of your childcare needs. Payment apps and systems make it easier every day to pay for your childcare faster and more efficiently. Childcare costs are hard enough; actually paying them doesn’t need to be a chore, too.