The federal dependent care flexible spending account (DCFSA) limit increased to $7,500 in 2026 following changes to the tax code in the One Big Beautiful Bill Act (OBBA).
However, states are not required to follow federal tax law, and some states have different DCFSA contribution limits meaning that state level income tax applies to a portion of DCFSA contributions that are otherwise exempt from federal income tax. Wisconsin is one of those states, among others.[1] Other states, like Illinois, Minnesota, and Michigan, conform their DCFSA income tax exclusions to federal tax law.
Wisconsin Tax Treatment
Wisconsin tax law still limits the income tax exclusion for DCFSA contributions to $5,000 for the purposes of Wisconsin state income tax. Wisconsin Tax Bulletin 234 confirms that only $5,000 can be excluded for Wisconsin income tax purposes, compared to $7,500 for federal income tax purposes.
That means an employee subject to Wisconsin income tax who elects to contribute to a DCFSA beyond $5,000 will have to pay Wisconsin income tax on any DCFSA contributions beyond $5,000. For example, an employee who elected the full $7,500 federal DCFSA limit will pay Wisconsin income tax on $2,500 while not having to pay any federal income tax on those contributions.
Employer Next Steps
- Start withholding Wisconsin income tax on DCFSA contributions beyond $5,000, if not already. If an employer has not already started this withholding, they would be well served to discuss how to handle this situation with their tax advisor.
- Communicate to Wisconsin employees the different Wisconsin income tax treatment for DCFSA contributions beyond $5,000. Employees should be aware any contributions beyond $5,000 will be subject to Wisconsin income tax despite the more favorable federal income tax treatment.
- Look ahead to 2026 W-2s. The amount of federal taxable income and Wisconsin taxable income on an employee’s W-2 will be different given the different DCFSA income tax exclusion for federal and Wisconsin income tax purposes.
Key Takeaway: Employers with employees subject to Wisconsin income tax should take note of the different income tax exclusions for DCFSA contributions at the federal and state tax level. Employers will also want to check with a tax advisor regarding the DCFSA contribution limit in other states with state level income tax.
[1] Employers should discuss the state level tax treatment in other states with their tax advisor for state specific tax advice.
The information provided is a summary of laws and regulations relating to employee benefit plan compliance. This information should not be construed as legal advice. In all cases, employers should consult with their own legal counsel.
