They are not subject to FICA tax, because the amount is less than $2200 (each).  They most likely also qualify under the grandparent exception, but that depends on your marital status.

They should report it  as household employee income, which makes it earned income. 

In TurboTax, enter at:
 Federal Taxes
Click on Wages and Income
Scroll down to Less Common Income
On Miscellaneous Income, 1099-A, 1099-C click the start button
On the next screen click the start button on Other Income not already reported on Form W-2 or Form 1099
Answer Yes on the next screen and enter the amount under Household Employee Wages.

TurboTax will put the income on line 1 of form 1040 with the notation "HSH". This income is earned income and would qualify for the Earned Income Credit (if they're under 65) and for making an IRA contribution.

Thanks for addressing the questions.

I am divorced. 

Do I have to provide 1099 or W2 forms to them? 

Thank you. 

Q. Do I have to provide 1099 or W2 forms to them?

A.  No.  You should pay by check, just in case you have to prove payment to the IRS or your FSA administrator.

 "I am divorced". 

It doesn't matter in your parent's case, since they were paid less than $2200.  But, for others reading this, There is an exception to a grandparent being exempt form the nanny tax:  you (the child's parent) "should count wages to your parent if both of the following apply:

(a) your child lives with you and is either under age 18 or has a physical or mental condition that requires the personal care of an adult for at least four continuous weeks in a calendar quarter

 and

(b) you are divorced and have not remarried, or you are a widow or widower, or you are married to and living with a person whose physical or mental condition prevents him or her from caring for your child for at least 4 continuous weeks in a calendar quarter."

Thank you very much.

One more question:

If I am going to pay total cash wages of $1,000 or more in any calendar quarter of 2021 to my parents, do I need to pay federal unemployment tax or do my parents need to pay federal unemployment tax?

Thank you!

Hi Hal_Al,

I'm not sure that putting them under household employee is correct but I've also been told so many different things that I don't know for sure.

I also am married and my parents watch my children in my home and I pay them.  I filed for the dependent care credit and my situation meets the requirements to be exempt from paying them taxes.

However, I was told by a turbo tax CPA that they should not put the income under household employee because the IRS would consider it taxable income for them.  They said to have them file it as self employment income and indicate that it is money made by being a caregiver to their grandchildren.  

Does this sound correct?  The sum is over $10,600 and the household employee area indicates that you can't put the sum there if its over $2200.  

It's taxable income, to them, whether it's reported as household employee (HSH) or self employed income.  If reported as self employment, TurboTax (TT) will calculate self employment tax (SET - social security & medicare) in addition to income tax.  There is no way to indicate  being a caregiver to their grandchildren, to avoid SET.

In TT, you ignore the $2200 HSH limit, as it doesn't apply to grandparents. TT will not block you, from continuing,  when you enter a larger amount. 

Whether you file your parents on sch H as household employees or not, their income is not employee income so it must be self-employment income in this case. File the sch H as required.

Pub 926 Household Employers Tax Guide from the IRS is the ultimate authority. Page 11 discusses required forms. If it was not a grandparent, you would have to provide a w2. 

Here is the actual schedule H so you can see what the form looks like and Instructions for Schedule H (Form 1040), Household Employment Taxes.

@Hal_Al answer just popped and is correct.

@efender

Ok thank you for the reply.  Do you have any idea why I would be advised by other CPAs to put my income that I've earned from taking care of my grandchildren as self employment income?  

This is the third place that I've been told to put it on my taxes.  First as a 1099-misc, then as self employment, then as a household employee.  I just don't understand how reporting income could be this difficult with so many unknowns.  

This can be a confusing area when it comes to parents who are caring for their grandchildren.  It's important to report for both the grandparent and the parent to follow the same procedure based on your earnings and their deduction. The IRS has made it more clear about how to report, but Congress can make things complicated.

You have our awesome Tax Expert @AmyC and Tax Champ @Hal_Al providing excellent guidance.

@efender