@Kilulululu wrote:
Hi, I read through all the responses and I am still a little bit confused. It seems like there is a grandparents exception applied to pay your parents for babysitting. I am thinking to hire my uncle to babysit my son for a month in my house and I will pay him using DCFSA fund. From what I read, it seems like he is qualified as household employee, does that mean I have to issue him a W2 and pay social security tax and other withholding tax for him since his is not my parent? Thanks!
You should review tax topic 756 and publication 926 which is linked there.
https://www.irs.gov/taxtopics/tc756
To spend funds from a DCFSA, you must provide sufficient proof to the plan administrator to satisfy IRS regulations. This might include receipts, canceled checks, and/or a W-10 form with the provider's social security number. This is separate from income tax reporting.
For income tax purposes, if you pay someone to work in your home, they are your household employee. If you pay them more than $2,200 in a year, you must give them a W-2. You must also withhold and pay household employee's tax and social security and medicare tax for the employee, unless they are your child or your parent (or your spouse's parent if you are married).
For the social security and medicare tax, you have two options. Option 1 would be to withhold from their pay. For example, if you agree that the will be paid $100 per day, you would actually pay $92.35 per day. The $7.65 represents social security and medicare tax. On your tax return, you will pay $15.30 of household employee tax, which represents $7.65 from the employee and $7.65 from you.
Or, you could pay the employee the straight $100. Your household employee tax would still amount to $15.30, but coming all from you. (Technically, you are paying $107.65 in wages and withholding $7.65.)
This is all covered here. Publication 926, Household Employer's Tax Guide PDF
If you are only paying your uncle for one month, it may be less than the $2,200 threshold in which case you don't need to issue a W-2 or pay HHE tax. Your uncle would be on the honor system whether or not to report the income on their tax return without a W-2. However, you will still need adequate proof of the expense for the DCFSA administrator.
[Edited to add]
Additionally, when you file your tax return, you must provide the name, address and SSN of the care provider in order for the DCFSA to be qualified as tax-free. This is required regardless of whether the care provider is your employee or not, and regardless of whether they fall above or below the $2,200 threshold for filing a W-2 for them.
