@Chillkann wrote:
Thank you for all the responses. It makes amply clear what the process is, except there is one situation that I haven't come across in all the questions and the corresponding replies:
What if a relative who is visiting us from outside the country and does not have an SSN or an ITIN but did help us with taking care of the baby for 6 months, can we pay her via the FSA funds?
You have two complex issues here, one much more than the other.
First, you need to provide some kind of information about the caregiver to get the FSA administrator to release the funds. Normally this would be an SSN or ITIN, international tax ID number. However, a non-resident alien can't usually get an ITIN until they file a tax return. So you will need to contact the FSA administrator to ask them what documents they would require to release the funds.
Then, tax issues for employers of aliens is complex. There are two things to resolve first,
a) is the relative your parent (or your spouse's parent)?
b) does your relative pass the substantial presence test, which makes them a resident alien?
https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test
You said "6 months" -- if they are in the US more than half the year (183 or more days) they are a resident alien; if 182 days or less, they are may be a non-resident alien, depending on their time in the US is previous years.
For a resident alien, the tax laws are the same as for a US citizen. You must pay household employee tax and issue a W-2. If the person is your parent, you don't have to pay household employee tax, and if you pay less than $2200 in wages, you don't have to issue a W-2.
You must issue the W-2 even if the person is not legally allowed to work in the US -- the IRS won't inform on ICE, but they want their money. I don't know how you would do this, unless the person already has an ITIN from a previous year. I suppose you might skip the W-2, and the person includes the income on a tax return with "HHE" next to it, and they can apply for an ITIN as part of filing the tax return.
If the person is a non-resident alien, you may be required to withhold 30% of their income for tax purposes and send it to the IRS. They would get it back as a refund if they file a tax return and owe less than 30% income tax. If they are a non-resident alien, they would file a form 1040-NR which is not covered by Turbotax, they would need a different tax software company.
Overall, I would say if the person passes the substantial presence test and already has an ITIN, then you can pay them under the same rules as if they were a US citizen, so go ahead and do it if you think you understand those rules. If the person does not pass the substantial presence test, I would be concerned about all the things that could go wrong, and I'm not sure that your tax savings would be enough to pay for the professional advice you probably need.
