Nanny Tax Rules

[LIZZIEO]

In 2022, I babysat my grandchild full time (January through December) in my daughter's home, for which she paid me just under $6000. I did not work elsewhere.  I am not interested in earning social security benefits. My husband is retired and receives social security. We file our taxes jointly.

My daughter and her ex-husband divorced mid-year (August 2022). She has full custody and receives monthly child support from her ex-husband. (One factor determining the amount of child support that she receives is based on the fact that she does pay for childcare.)

Given our situation, I have several questions based on 2 different scenarios:

Scenario #1:

If my daughter does not claim the Child and Dependant Care Credit, can I consider what she pays me as a "gift" and, therefore, not have to declare it as income on my taxes? OR

Scenario #2:

If my daugter does claim the Child and Dependant Care Credit,

a) how does my daughter classify me as caregiver when filing her taxes on and what forms does she need to supply me with? AND

b) how do I classify myself (ie "self-employed" or "household employee") and declare the income when filing my  and my husband's taxes on Turbotax?

Lastly, will the Deluxe Federal and State version of Turbotax be sufficient given our situation, or do you recommend another?

[LIZZIEO]

So sorry, new to the community, I believe that I posted this under the incorrect area of interest.

[RalphH1]

Family members do give gifts (of course), and $6,000 in one year (if there were no other large gifts) wouldn’t be subject to the “gift tax” (or even reportable, as this article says). However, if the payment was actually made as compensation for the child care services you were providing, the government would call it taxable income.

Importantly, they distinguish between care which takes place in the provider’s (your) home, and care which takes place in the youngster’s home. You’re considered the provider of “Child and Dependent Care” in the first case, but a “Household Employee” (the "nanny tax" in your title—more info here, and here) in the latter.

For the return preparation, your daughter would need to file a Schedule H with her return (saying “yes” to the TurboTax question about having an employee in the home), report and pay the FICA and unemployment tax on that form (there’s an exception for payments to parents, but it doesn’t apply if she’s divorced and not remarried), and then issue a W-2 to you. (There is a link in our program to apply for an “Employer ID number,” which would also be needed.) You would then include that W-2 income when preparing your own return, entering it like you would enter any W-2, and that would be the extent of your obligation.

The links above have details on that process, and here's a more complete (official IRS) guide to the rules. I know you were probably hoping for a simpler response, #LIZZIEO, but I hope this helps!

[LIZZIEO]

Thanks so much for your advice and input!