grandparent watching kids - how to file 1099 and taxes

[pasknyc]

Thanks for the detail - that's helpful! 

"probably self employed"  - i am still pretty sure this applies to if you are running a business of babysitting - whether you are babysitting relatives/ friends etc.

"In one case, the Tax Court held that grandparents who provided care only for their own grandchildren and received payments from a state-sponsored childcare assistance program had to pay income tax on the payments, but the payments were not subject to self-employment tax because the grandparents’ primary purpose in providing the care was not to make a profit."

I think the main point here is not that the grandparent was paid state sponsored childcare but that the tax court ruled that the grandparent was not in it to make a profit which disqualified self-employment tax. I'll probably end up asking a tax lawyer just to confirm. 

The original link i posted referred to a tax court ruling:

here is a tax book that refers to it too. https://books.google.com/books?id=dl_SDwAAQBAJ&pg=PA770&lpg=PA770&dq=state+assistance+grandparent+ta...

[macuser_22]

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@pasknyc wrote:

Thanks for the detail - that's helpful! 

"probably self employed"  - i am still pretty sure this applies to if you are running a business of babysitting - whether you are babysitting relatives/ friends etc.

"In one case, the Tax Court held that grandparents who provided care only for their own grandchildren and received payments from a state-sponsored childcare assistance program had to pay income tax on the payments, but the payments were not subject to self-employment tax because the grandparents’ primary purpose in providing the care was not to make a profit."

I think the main point here is not that the grandparent was paid state sponsored childcare but that the tax court ruled that the grandparent was not in it to make a profit which disqualified self-employment tax. I'll probably end up asking a tax lawyer just to confirm. 

The original link i posted referred to a tax court ruling:

here is a tax book that refers to it too. https://books.google.com/books?id=dl_SDwAAQBAJ&pg=PA770&lpg=PA770&dq=state+assistance+grandparent+ta...

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If you are babysitting in your own home whether one related child or several then  you *ARE* a business by law. 

Again your reference refers to a " state-sponsored childcare assistance program".   What part of that do yu not understand?   "That ain't you"

[pasknyc]

"If you are babysitting in your own home whether one related child or several then  you *ARE* a business by law. " 

LOL I think you are missing the point.  Tax court says Grandma sitting with grandchild only doesn't have a profit motive (it doesn't matter that the context of the court case was her receiving childcare assistance - that's irrelevant). 

No profit motive = you are *NOT* a business

Anyway i am done arguing. I'll ask a lawyer. 

[macuser_22]

Please do ask a tax attorney.   You arr not even reading (or comprehending) your own references. 

Your tax court case said: In one case, the Tax Court held that grandparents who provided care only for their own grandchildren and received payments from a state-sponsored childcare assistance program .

What part of "state sponsored' don't you understand?  Good luck and goodby.

[AmeliesUncle · Accepted solution]

I hate to disagree with MacUser, but I agree with the OP; a grandparent watching only their grandchild is rarely a business.  In most cases it should be reported as "other income".  

The source of the payments do not matter.

However, properly reporting it as "other income" will likely result in MORE tax than if it was reported as a business.

If it was a business, all of the expenses would be a deduction.  For a daycare business, that is A LOT of deductions.   It would almost certainly result in a loss.   Interestingly, if the grandparent were to continue to report losses year after year, the IRS could audit her, look at the situation, and reclassify it as a non-business ... which would be reported as "other income" with no deductions.  

[pasknyc]

@AmeliesUncle you are probably right that it's more tax as a hobby vs. all the deductions as a daycare biz - but the amount is small to begin with - keeping all the record of expenses for a grandparent would just be a huge hassle that doesn't make sense. easier if it was hobby and to not pay SE tax

[macuser_22]

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@AmeliesUncle wrote:

I hate to disagree with MacUser, but I agree with the OP; a grandparent watching only their grandchild is rarely a business.  In most cases it should be reported as "other income".  

The source of the payments do not matter.

However, properly reporting it as "other income" will likely result in MORE tax than if it was reported as a business.

If it was a business, all of the expenses would be a deduction.  For a daycare business, that is A LOT of deductions.   It would almost certainly result in a loss.   Interestingly, if the grandparent were to continue to report losses year after year, the IRS could audit her, look at the situation, and reclassify it as a non-business ... which would be reported as "other income" with no deductions.  

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The IRS would disagree with you. As pointed out above the IRS specifically addresses this in Pub 17.    Being self-employed IS business income in the eyes of tax law, even if you only babysit a relatives child for a few hours.   If paid more than $400 it must be reported as self-employed income.

And expenses, if any, are deductible on schedule C.   For example:  food provided for the child by the sitter would be deductible or other sitter provided supplies, such as diapers. baby wipes, etc.

Refer to IRS Pub 17

https://www.irs.gov/pub/irs-pdf/p17.pdf page 44 for the rules of child care providers  and babysitters.

Babysitting. If you’re paid to babysit, even for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you

Childcare providers. If you provide childcare, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. If you aren’t an employee, you’re probably self-employed and must include payments for your services on Schedule C (Form 1040 or 1040-SR), Profit or Loss From Business. You generally aren’t an employee unless you’re subject to the will and control of the person who employs you as to what you’re to do and how you’re to do it.

It is also not "other income" which is defined on page 29 of the 1040 instruction - babysitting is not "other income" as defined in IRS pub 525.

https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

[AmeliesUncle]

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@macuser_22 wrote:

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The IRS would disagree with you.

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Probably not.  And if they did, the Tax Court would agree with me.

The IRS and the Tax Court looks at what is commonly called the Nine Factors (which is largely based on §1.183-2) to determine if an activity is a "business" or a "hobby".

Going off of what the OP has said and that a person only watching one child is almost certainly going to show a loss, most or all of the Nine Factors would be "no".  

https://www.irs.gov/faqs/small-business-self-empl[product key removed]ess/income-expenses/income-exp...

https://www.journalofaccountancy.com/issues/2013/oct/20138370.html

https://www.law.cornell.edu/cfr/text/26/1.183-2

[Anonymous]

but there is an important preamble to the 9 tests

No one factor is determinative in making this determination. In addition, it is not intended that only the factors described in this paragraph are to be taken into account in making the determination, or that a determination is to be made on the basis that the number of factors (whether or not listed in this paragraph) indicating a lack of profit objective exceeds the number of factors indicating a profit objective, or vice versa.

certainly, if the grandmother were to property report losses year after year, the IRS would classify it as a hobby.  but if it's profitable, they would hit her with SE tax.  

[pasknyc]

That would seem like a strange way to define the activity only by whether it's profit making. The activity is either a "hobby" or it is a "business". A hobby could be profit making too. 

[Critter]

Ok ... since you want to use either the day care credit form 2441  OR  use up the FSA funds then the person you pay MUST declare the income on their return so they MUST complete a Sch C.   The IRS allows you to take the tax deduction ONLY IF someone else is reporting it on your tax return.  That is the only reason these tax deductions were allowed.

Now ... if  you were not claiming one of those deductions then  giving mom a few dollars to watch the kid(s) is usually considered a non taxable gift and not reported on anyone's  income tax return.   

So you see the reason behind the action is the key.  

[macuser_22]

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@Anonymous wrote:

but there is an important preamble to the 9 tests

No one factor is determinative in making this determination. In addition, it is not intended that only the factors described in this paragraph are to be taken into account in making the determination, or that a determination is to be made on the basis that the number of factors (whether or not listed in this paragraph) indicating a lack of profit objective exceeds the number of factors indicating a profit objective, or vice versa.

certainly, if the grandmother were to property report losses year after year, the IRS would classify it as a hobby.  but if it's profitable, they would hit her with SE tax.  

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And of course, if she is paid more then the ordinary and necessary expenses that a babysitter has, the difference is profit.    If she is simply reimbursed for her expenses and not more then the expenses cancel the income so  there would be no income to report.

[pasknyc]

@Critter 

The question is not whether grandma would report the income - she would because FSA funds are being used. The question is HOW she would report it. As Other income because there is no profit motive and therefore it's not a business activity, or as Schedule C/ self employment

[macuser_22]

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@pasknyc wrote:

The question is not whether grandma would report the income - she would because FSA funds are being used. The question is HOW she would report it. As Other income because there is no profit motive and therefore it's not a business activity, or as Schedule C/ self employment

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Bottom line - she can report it anyway that she wants, but if *you* deduct it as child-care expenses on your tax return with your mom's  SSN as the child care provider then if she does not report it on a schedule C and pay the SE tax, it is a 80% probability that she will receive an IRS audit letter in a year or two asking for the schedule C and SE tax and a big bill for back interest.     Your deducting it as child care makes her a child care provider by definition whatever she wishes to call herself.

[AmeliesUncle]

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@Critter wrote:

Ok ... since you want to use either the day care credit form 2441  OR  use up the FSA funds then the person you pay MUST declare the income on their return so they MUST complete a Sch C.   The IRS allows you to take the tax deduction ONLY IF someone else is reporting it on your tax return.  That is the only reason these tax deductions were allowed.

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Critter, there is NOT such a requirement that is needs to be paid to a business. 

As Hackinoff pointed out, all of the Nine Factors are looked at, and there isn't any one that is a determinative one.   But both the IRS and Courts look at those Nine Factors, and when most or all of them are "no", the answer is pretty clear.