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Your Family's Need for Childcare

Does it make financial sense?

Your Family's Need for Childcare Recent United States Census reports show that more than 8 million children under the age of five spend some part of their day in the care of someone other than their parents. Many of these parents had to make tough decisions regarding the care of their children.

Making the Cost/Benefit Analysis
For many parents, there is no question as to whether a childcare arrangement is necessary. Financial or other situational limitations require both parents to work full-time. Many other families, however, must weigh the costs—both monetary and emotional—of making childcare arrangements against the benefits of remaining employed. To make the cost/benefit analysis, start with a piece of paper. Make two columns, one representing the monetary expenses and other sacrifices of working, the other for the financial as well as nonfinancial gains from continuing to work. List the costs and benefits in their appropriate columns. Having both sides of the equation laid out right in front of you may help make the decision, if not easier, at least a bit more clear and well-reasoned.

Benefits of remaining employed may be tangible. Examples are the paycheck you receive and the health insurance or 401(k) plans your employer provides. There are other, intangible advantages too, such as the personal satisfaction a person receives from a job well done. Benefits may include the following:

• staying on a career path;
• keeping up with advances within your profession;
• having contact with other adults;
• travel (although this is a benefit to some and a detriment to others); and,
• social perks, such as lunches and recreational outings.

The most obvious financial cost of working and placing children in a day care setting is the fees for the childcare itself. However, there are other expenses of being employed as well. For example, many employers have a certain dress code they require employees to adhere to, which means employees must spend part of their income on suitable clothing for the workplace. Some employees are expected to eat out on their lunch breaks, resulting in more expense. Transportation costs, such as gasoline or train fare, also must be factored into a cost/benefit equation. Moreover, a significant portion of the second income may be eaten up by income tax, particularly if the primary earner's income puts the household into the highest tax bracket.

Besides the regular paycheck and nonmonetary perks, there are other forms of financial compensation that a second income-earner gives up to remain home raising children. A company may provide a 401(k) plan for its employees, but typically will have vesting requirements that dictate the employee remain with the company for a certain number of years before being entitled to the money. Leaving a job before vesting occurs can cost a high price in later retirement income.

Another cost can come in the form of missed opportunity to pay into Social Security. Many agree that this federal system of retirement benefits is seriously flawed and might not be available ten or twenty years from now. However, leaving paid employment to stay home with children might seriously affect a person's entitlement to Social Security benefits down the road.

Whether you are eligible to receive benefits at all depends upon how many credits you have earned, which in turn is based upon how much you earn in a year and the number of years you contributed to the fund. The amount of the monthly Social Security payment a retiree receives depends, in general, on average earnings over the course of his or her career. Taking a hiatus from working, even for just a few years, cuts into this fund. The difference in benefits later on may determine whether you can fully retire or will need to supplement your income even after becoming eligible for Social Security.

Nonmonetary costs are harder to evaluate. If your child is attending childcare outside of your own home, you must consider the stress of having to get him or her fed, dressed, and ready to go every day before you leave for work. You have to leave enough time to drop him or her off so that you are not late for work. Even if you have in-home childcare, if there is a crisis at work and you need to stay after your regular day is over, you must have a back-up plan for picking up your child from the day care provider. And you always have to be prepared for the possibility that either your child will be sick or the day care provider will not be available for some reason. The most important consideration, of course, is whether your child will thrive in a childcare setting—a factor that is discussed later in this book.

Working the numbersStart with the Monetary Expenses
While the childcare decision is not usually strictly a financial one, it is easiest to start by tallying up the monetary expenses. First, calculate your house­hold's tax liability. Figure your taxable income (including your spouse's, if applicable) by subtracting all deductions and exemptions to which you are entitled. Consult the IRS tax tables, found in the instructions accompanying Form 1040 or 1040A, to determine your tax. Then subtract from that amount all tax credits for which you are eligible. Add to the total any other taxes you may owe, such as FICA (Social Security and Medicare taxes) and state income tax (if any). This amount is your total tax liability.

To your tax liability amount, add the yearly expenses that you incur solely because of the fact that you work. These costs include the gas money you spend to get to work and the parking fees you would not have to pay if you did not drive every day. Add extra expenditures that you make for items such as work clothes and lunch that you would not be purchasing if you did not work away from home. Include in your total either the amount that you already spend or the estimate of what you would spend for your childcare arrangement.

After adding up taxes paid and work-related expenses incurred, sub­tract that total from your gross income. Now you have what this book will call your net cash benefit, which is the annual dollar amount you have, free and clear, as a result of your hard work.

Example: In 2004, Hank and Wendy have two children, ages 12 months and 5 years. Hank earns an annual salary of $60,000; Wendy's is $40,000. Wendy has a short drive to work, and eats lunch out only a few times a month. As a result, she has only a little more than $1,000 worth of nontax, work-related expenses. The breakdown of their financial situation, both with and without the second income, is as follows.

Assumption Two Incomes One Income Gross income $100,000 $60,000 Less: Standard deduction and exemptions ($22,100) ($22,100) Taxable income $77,900 $37,900 Tax (according to tax table) $12,956 $4,974 Less: Child Tax Credit and Credit for Child and Dependent Care Expenses ($3,200) ($2,000) Net federal income tax due $9,756 $2,974 Plus: FICA and State income tax $10,450 $6,270 Total tax liability $20,206 $9,244 Plus: Day care expenses $13,000 n/a Commuting expenses $1,605 $1,070 Extra lunch/clothing expenses $1,500 $1,000 Total work-related expenses $36,311 $11,314

When you subtract the combined work-related expenses from gross income in this example, you arrive at a net cash benefit of $63,689 for the two-income family and $48,686 for the single-income family. The difference in net cash benefit from giving up the second income of $40,000, therefore, is about $15,000.

Reaching a decisionEvaluate Your Results
Once you have figured out the financial benefit from both parents continuing to work, the more difficult part of the equation comes into play. Is the net cash benefit, the missed contributions to pension plans, 401(k)s, and Social Security, and the passed-up opportunities for advancement, plus the other, intangible advantages of working, worth the costs and sacrifices of continuing to work and placing your child with a day care provider?

For some families struggling to make ends meet, the net cash benefit is really the only consideration—they cannot afford the loss of income from one parent staying home to care for the child. In the case of single-parent families, there is not even a second income to give up.

It is hard to know ahead of time whether a long-term hiatus from outside employment would be right for you. For some people, staying home with their children sounds like a vacation. Trips to the zoo and walks in the park with your kids are great—who would not choose a day spent reading to your little one over eight hours at a desk job? The reality for the majority of us, however, is that full-time parenting at home is no picnic. Even being home for several months on a maternity or paternity leave will not give you a clear picture of life as a stay-at-home parent.

Dealing with the Guilty Parent Syndrome
Some parents may be guilt-ridden because they have chosen to work and have placed their children in a day care setting. Others feel guilty because they do not have the choice of staying home. Some segments of our society frown upon mothers working outside the home. Normal families are often portrayed as having a stay-at-home parent, typically the mother. This implies that two-income families are unusual or less desirable. Of course, nothing could be further from the truth.

Children do well in life if they have high-quality childcare, and not as well if they are in lower-quality childcare. This, it would seem, is not a surprising result.

Working parents provide many benefits for their children beyond just the financial ones. Having working parents helps to instill a strong work ethic in children. Seeing their mothers work is a good thing for children. This is particularly the case for girls, who need positive female role models in many areas—including parenthood—to instill that they have choices as adults.

If you really feel that your children would be better off if you were home with them, but you still need your income to make ends meet, consider whether you can afford the compromise of part-time work. Flextime, the rearrangement of an employee's work hours to better suit the schedule of family responsibilities, is becoming a very common perk offered by companies to retain good employees. Job sharing, the splitting of a single shift or a work week by two employees, who each work part of the shift, is another option at a large number of companies.

Most importantly, remember that all children are different and will respond in their own way to a given situation. Many children thrive in a childcare setting where they are exposed to new experiences and have lots of other children with whom to play. Others benefit from having not just a set of parents who love them, but a nanny or another family member with whom they can also interact on a regular basis. The best advice is to follow your instincts in making childcare decisions.