Paying Employment taxes and use of EIN when Aide paid from First Party Special Needs Trust

[turboNancy2]

I am my disabled son's Legal Guardian and Trustee of his First Party (self-settled) Special Needs Trust. We live in Washington State. I have hired an aide for him and will be paying the aide from his Special Needs Trust. The Trust has an EIN. The SS-4 application for the EIN stated that he is the "responsible party" and I am the Trustee.

The State of Washington had me set up a business as a sole proprietorship, using my name, so that I could pay the Aide. The WA Employment Security Dept. asked me for an EIN, and I provided the Trust's EIN since I will be paying him from the Trust. However, my own name is the "business name." Is this going to cause problems down the line when I, as the employer, pay federal employment taxes? And would I include Schedule H on his 1040 return? Or the trust's 1041? Should I have set up the business as a Trust instead of a Sole Proprietorship? The state had me set up a "business" only so I could get a UBI number. 

[DaveF1006]

Yes, I can see why the State of Washington had you set this up as a separate business. This was done solely to obtain a UBI number that is only unique to the State of Washington.  

Since you are paying from a trust rather than your own personal account, you would need to include a Schedule H from your trust account. Turbo Tax Business for a 1041Trust Account has the ability to generate a W2 from the program to issue to your household employee. The bad news is that Schedule H is not supported in Turbo Tax Business, even though it is permitted to by the IRS, thus the form would need to be filled out, printed, and mailed to the IRS along with the 1041 return. It can not be filed electronically. Mailing instructions are provided with your 1041 return once prepared.

Here is a pdf copy of this form and the instructions stating it can be attached to  Form 1040, 1040-SR, 1040-NR, 1040-SS, or 1041. 

If you submit payroll taxes to the State of Washington in your own name with the Trust EIN, this shouldn't be an issue but I would submit a name change changing it to the Trust name to avoid any future confusion.

Your son will not report a Schedule H in his own personal tax return.  This will be filed strictly within the trust 1041 return. Also, you won't need to file a separate 1040 business return since you only established it to satisfy a State of Washington requirement.

I would submit a name change to the State of Washington to change the name of the sole proprietorship to the trust name rather than your own personal name to avoid any confusion. Additionally, you may wish to submit a name change to the IRS in accordance with these instructions.

[turboNancy2]

Thank you very much!  I do have a follow-up question:

Because this is a Grantor-type trust (a first-party Special Needs Trust), the income is taxable to the grantor under sections 671-678 of the IRC (see www.specialneedsalliance.org).  Therefore, I actually file an informational 1041 along with a Grantor Trust Information Letter, instead of a full-blown 1041.  All income, deductions and credits are reported on the personal income tax return of the beneficiary (my son). Should the Schedule H, therefore, be included with the informational 1041, even though I am only filing an informational 1041?  Or, in this case, should I attach it to my son's 1040?

[RobertB4444]

It should still be on the 1041 because the trust's EIN is on the payroll forms that you filed and the trust is who is paying the payroll taxes (which is what schedule H is for).  If you already paid all of your payroll taxes then the schedule H is informational anyway.  If you have not paid your payroll taxes then you will submit them with the 1041.

The cost of the household employee can be claimed as a medical deduction on your son's tax return as well.  

@turboNancy2 

[turboNancy2]

THANK YOU so very much!  I have been struggling with these questions for many weeks, trying to find a local tax professional who could answer them, but couldn't find anyone with the right experience (I was lucky if they even called me back).  So I'm glad I finally found experts to help me.  🙂  

[turboNancy2]

Thanks for the previous replies to my question.  I am currently preparing my son's 1041 and have a follow-up question.

As I mentioned previously, because this is a Grantor-type trust (a first-party Special Needs Trust), the income is taxable to the grantor under sections 671-678 of the IRC.  Therefore, I actually file an informational 1041 along with a Grantor Trust Information Letter, instead of a full-blown 1041. I have prepared a Schedule H and plan to include it with this informational 1041.  Per the IRS 1041 instructions for Grantor Type Trusts, "If the entire trust is a grantor trust, fill in only the entity information of Form 1041. Don't show any dollar amounts on the form itself; show dollar amounts only on an attachment to the form."  Consequently, my understanding is that I should not enter the Household employment tax amount on Schedule G, Part I, line 7 and carry it forward to line 24 "Total Tax" on form 1041.  I should leave all of that blank and simply enclose the Schedule H, along with a payment voucher and payment/check for the taxes with the informational return.

Is this correct?

Thank you.

[DaveF1006]

Yes. Based on the IRS instructions for Form 1041, Grantor-type trusts should only fill in the entity information and not report dollar amounts directly on the form itself. Instead, those amounts should be included in an attachment. 

Schedule H should be included with the informational 1041, along with a payment voucher and check for the household employment taxes. You should not enter the tax amount on Schedule G, Part I, line 7 or carry it forward to line 2.

1041 Instructions