I am thinking of hiring my mother as household employee vs hiring my Dad as a1099 contractor,what's the difference?

[Astroboy2024]

Hello everyone. My elderly parents, both aged 65+ are coming to the US with green cards and they are not eligible for medicare/medicaid as they have not been in the US for 5 years. The main objective is for my parents to work and earn a household income close to the 100% FPL so that they qualify for the premium tax credit so that they can afford to buy health insurance on Marketplace. 

So shall I hire my mum as my newborn's nanny and pay her like a household employee? I read you don't need to give her a W2 or do any of the medicare/tax witholdings? Is that true? I want to pay her around 20K per year for childcare.

Another way is because I run a small business doing consulting, and I can hire my Dad as my virtual assistant so he can do the clerical work for my business and I can pay him 20K as a 1099 contractor. 

Which way is better and easier to file? What is the main difference between the 2?  As long as they both file jointly and report a yearly income of around 20k, they will have a good premium tax credit to buy insurance with. Thank you so much.

[Anonymous_]

@pk

[Opus 17]

If you hire your parent to be the caregiver of your child, you are correct that you do not have to issue a W-2.  The parent will file a tax return and will write in the amount of their income on line 1b.  They will not build up any credits in the social security/medicare system.  If they file a joint return with their spouse, they won't owe income tax if their income is less than the standard deduction, including the adjustment for over 65.  See here.

https://www.forbes.com/advisor/taxes/standard-deduction/

Because there is no paper trail (no W-2), and because it is very easy to claim fake income to get insurance credits, EIC, or other benefits, I believe this is an area of higher than normal scrutiny for the IRS.  (For example, it is a known scam for incarcerated persons to file false returns claiming income with no W-2 or 1099 for purposes of qualifying for false benefits.)  You will want to make sure your mother is paid using checks, or some kind of electronic draft that leaves a clear trail that can be shown to an auditor as proof she worked for you and was paid for that work.

If you hire your father as an independent contractor for your small business, you will need to issue a 1099-NEC if the amount is more than $600.  You can deduct the payments as a business expense.  Your father will have to file a tax return that includes a schedule C for self-employment.  He can deduct ordinary and necessary business expenses, if he has any.   He will pay 15% self-employment tax on the net profit from the business even if his total income is lower than the standard deduction for income taxes.  He will get credit in the social security system for the work.  This income would also qualify your father to contribute to an IRA.  

I think the short answer is that paying your father results in less tax for you because it is a deductible business expense, but more tax for your parents because of the 15% self-employment tax.

I don't deal with ACA insurance and the affordability credits, so I can't tell you if that amount of wages will enable a credit sufficient for your purposes.

I am slightly concerned that you are setting the wages based on the need to acquire insurance, rather than the value of the work performed.  In case of audit, you may want to retain proof that the monies were actually paid, that work was performed, and that the compensation was reasonable for the level of services performed.  

[pk]

@Astroboy2024 , 

Having read through this thread and generally agreeing with my colleague @Opus 17 ,  I have a slight different take on this situation.

You are correct that you don't have to issue  a W-2 to your household " employee" but then you have to file Schedule-H.

The main difference  of whom is an employee  ( W-2 or Schedule-H )   and whom is a subcontractor ( 1099-NESC ) is really the control the employer exerts of how the work is done -- see below note from the IRS.

Hiring Household Employees | Internal Revenue Service (irs.gov)

Also please read the following ( at least peruse  through so you are aware :(

p926.pdf (irs.gov)

As far a FICA / SECA area, there is really no age related exemption -- if you earn, you pay into Social Security and Medicare.   So I don't see the difference between the two schemes you are proposing  ( I recognize that this is not an area that I generally comment on because of lack of expertise and because there are others  whom are more attuned to this topic ).   Suggest you look into thew possibility of employing  both and thus ensure that each can stand  on his /her own feet ( even though they will file MFJ for the foreseeable future , but ultimately one will have to avail of  Medicare  by oneself

I don't know if this makes sense to you

pk

[Opus 17]

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@pk wrote:

@Astroboy2024 , 

Having read through this thread and generally agreeing with my colleague @Opus 17 ,  I have a slight different take on this situation.

You are correct that you don't have to issue  a W-2 to your household " employee" but then you have to file Schedule-H.

The main difference  of whom is an employee  ( W-2 or Schedule-H )   and whom is a subcontractor ( 1099-NESC ) is really the control the employer exerts of how the work is done -- see below note from the IRS.

Hiring Household Employees | Internal Revenue Service (irs.gov)

Also please read the following ( at least peruse  through so you are aware :(

p926.pdf (irs.gov)

Schedule H is not required when the household employee is the taxpayer's parent.  Follow lines A, B and C on schedule H and the corresponding instructions.  

Because schedule H is not required, the difference between the two methods is that with the mother as caregiver, the taxpayer does not get a business tax deduction for the wage, and no one pays household employee tax (social security and medicare tax).  With the father as bookkeeper, the taxpayer can deduct the compensation as a business expense but the father must pay self-employment tax (social security and medicare tax).  

[Opus 17]

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@Opus 17 wrote:

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@pk wrote:

@Astroboy2024 , 

Having read through this thread and generally agreeing with my colleague @Opus 17 ,  I have a slight different take on this situation.

You are correct that you don't have to issue  a W-2 to your household " employee" but then you have to file Schedule-H.

The main difference  of whom is an employee  ( W-2 or Schedule-H )   and whom is a subcontractor ( 1099-NESC ) is really the control the employer exerts of how the work is done -- see below note from the IRS.

Hiring Household Employees | Internal Revenue Service (irs.gov)

Also please read the following ( at least peruse  through so you are aware :(

p926.pdf (irs.gov)

Schedule H is not required when the household employee is the taxpayer's parent.  Follow lines A, B and C on schedule H and the corresponding instructions.  

Allow me to further clarify this.

If you employ a parent as a household employee, payment of household employee tax and filing schedule H is almost never required.  Household employee wages paid to a parent are subject to HHE taxes and Schedule H requirements if both of these statements are true:

1. The child is under 18, or is over 18 but has a condition that requires adult care,

AND

2. The taxpayer is divorced without being remarried, widowed without being remarried, or living with a  spouse who has a physical or mental condition and is unable to care for the child.

This is a bit weird, but it's how the instructions are written.  Employing a parent as a gardener or cook is not subject to household employee taxes.  Employing a parent as a nanny is not subject to household employee taxes if the taxpayer is married to a healthy spouse, or is a never-married single parent, but is subject to tax if the taxpayer is divorced or widowed or their spouse is ill.  There must be some logic that Congress used when they created those laws, but I don't know what it was.  

See page H-5 here, https://www.irs.gov/pub/irs-pdf/i1040sh.pdf