@Catalina219 wrote:
Thank you so much for your answer. I have a follow up question. My kid is 5 years old and my husband also works crazy hours but his physical or mental condition DOES NOT prevents them from caring for child for at least 4 continuous weeks in the calendar quarter services were performed - but just us working is to crazy to make it to get him from school on time. So it does not look like we would meet these 2 rules that have to happen at the same time.
Could we still pay my dad and declare that income? Do I need to do anything extra in that case since I do not meet the 2 conditions?
Thank you for your time
The two tests only apply to the requirement to issue a W-2 and withhold social security and medicare tax, and pay household employees tax. You generally must withhold and pay those taxes for any employee working in your home, but parents and some other relatives are exempt from the requirement. But, if the child is disabled and you meet the other tests, then you must withhold and pay those taxes even if the employee is a relative (because taking care of a disabled child is more like work-work and less like family helping out).
So you can pay your relative for care. As long as the child is not disabled, and does not meet the two tests, you do not have to issue a W-2, you don't withhold social security tax, and you don't file schedule H to pay household employee tax.
Your father must report the income on his tax return even if you don't issue a W-2. He includes the income on line 1 of form 1040 (along with any other income) and writes "HHS" next to the amount. It may or may not be taxable, depending on his other income and tax situations.
To claim the child care tax credit or use DCFSA funds to pay your father for care, you must report his name and SSN on your tax return on form 2441. That will inform the IRS to look for matching income on his return.
