Can my girlfriend be the payable nanny for my DCA?

[Unclesamlovesyou]

My girlfriend and I live together and we have two children together but we are not married. I have a dependent care account and I put in $5k a year. We aren’t sure if we will be using a nanny this year and I’m

wondering about the legality of paying her as the nanny. 

[xmasbaby0]

Your GF is the childrens' bio-mom?  NO you cannot use her as the paid childcare provider.   

[Unclesamlovesyou]

Correct. GF is the bio mom. You’re a real bummer by the way. Thanks for the answer though. 

[ColeenD3]

You could if she were not the child's parent. In that instance, she would have to report the income and you would have to issue her a W-2.

Care Providers

You must identify all persons or organizations that provide care for your child or dependent. You must report the name, address, and TIN (either the social security number or the employer identification number) of the care provider on your return. If the care provider is a tax-exempt organization, you need only report the name and address of the organization on your return. You can use Form W-10, Dependent Care Provider's Identification and Certification to request this information from the care provider. If you can't provide information regarding the care provider, you may still be eligible for the credit if you can show that you exercised due diligence in attempting to provide the required information.

If you pay a provider to care for your dependent or spouse in your home, you may be a household employer. If you're a household employer, you may have to withhold and pay social security and Medicare taxes and pay federal unemployment tax. For more information, refer to Do You Have Household Employees? in Publication 503, Publication 926, Household Employer's Tax Guide, or Topic No. 756.

Payments to Relatives or Dependents - The care provider can't be your spouse, the parent of your qualifying individual if your qualifying individual is your child and under age 13, your child who is under the age of 19, or a dependent whom you or your spouse may claim on your return.

Tax Topic 602

[Edited 2/7/22|12:15PM EST]

[Unclesamlovesyou]

Ok ok. Follow up question: is it worth it to do that if she’s going to have to pay taxes on the $5k? I shave $5k off of my income and then pay taxes on $5k later.. my girlfriend doesn’t have any other source of income. I suppose that I’m paying taxes on the $5k at a much lower bracket. Or do you even pay taxes if you only make $5k???

[xmasbaby0]

What is the Child and Dependent Care Credit?

SOLVED•by TurboTax•3833•Updated 1 month ago

The Child and Dependent Care Credit (not to be confused with the similar-sounding Child Tax Credit) can reduce your tax bill if you paid for a dependent's care so that you could work or look for work.

To qualify for this credit, you must meet all of these criteria:

• You (and your spouse, if filing jointly) must have earned income
  • The earned income requirement for one spouse is waived if they were a full-time student or disabled (if they lived with your spouse for more than 6 months in 2021)
• You paid caregiving expenses so that you (and your spouse, if filing jointly) could work or look for work
  • The work/look for work requirement for one spouse is waived if they were a full-time student or disabled (if they lived with the other spouse for more than 6 months in 2021)
• You paid a caregiver to care for a Qualifying Person. The caregiver can't be:
  • Your spouse
  • Your dependent
  • Your child if they were under 19 on the last day of 2021, even if not your dependent
  • The parent of the Qualifying Person, if the Qualifying Person is your child under the age of 13 during 2021
• You can't file with the Married Filing Separately filing status (except under certain circumstances)
• You must furnish the care provider's name, address, and (unless it's a tax-exempt organization) their SSN, ITIN, or EIN on your return

The credit is worth as much as 50% of your qualified expenses, up to $8,000, (for one qualifying person), and $16,000 (for two or more qualifying persons). Your percentage depends on your AGI, with the higher percentages applying to lower incomes and vice-versa.

As an example, a married couple supporting two qualifying persons who paid $16,000 in qualified expenses may qualify for up to $8,000 in credits, depending on their AGI. 

TurboTax will determine your eligibility and calculate the maximum credit allowed.

Related Information:

• Who is a Qualifying Person for the Child and Dependent Care Credit?
• What is the Child Tax Credit?

[Opus 17]

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@Unclesamlovesyou wrote:

Ok ok. Follow up question: is it worth it to do that if she’s going to have to pay taxes on the $5k? I shave $5k off of my income and then pay taxes on $5k later.. my girlfriend doesn’t have any other source of income. I suppose that I’m paying taxes on the $5k at a much lower bracket. Or do you even pay taxes if you only make $5k???

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Sorry, the parent of the child can never be a qualified care provider for the child care credit or the FSA benefit.  See for example, the instructions for form 2441 on page 3,

https://www.irs.gov/pub/irs-pdf/i2441.pdf

You can take the credit or the exclusion if all five of the following apply.

1. Your filing status may be single, head of household, qualifying widow(er) with dependent child, or married filing jointly. If your filing status is married filing separately, see Married Persons Filing Separately, later.

2. The care was provided so you (and your spouse if filing jointly) could work or look for work. However, if you didn't find a job and have no earned income for the year, you can't take the credit or the exclusion. But if you or your spouse was a full-time student or disabled, see the instructions for lines 4 and 5, later.

3. The care must be for one or more qualifying persons. See Qualifying Person(s), earlier.

4. The person who provided the care wasn't your spouse, the parent of your qualifying child, or a person whom you can claim as a dependent. If your child (including stepchild or foster child) provided the care, he or she must have been age 19 or older by the end of 2021, and he or she can't be your dependent.

5. You report the required information about the care provider on line 1 and, if taking the credit, the information about the qualifying person on line 2.

[ColeenD3]

Both Xmasbaby and Opus17 are correct. I missed the part where you said she was the child's parent. I was unsure of her status so I quoted the IRS in my follow-up remarks.

[Unclesamlovesyou]

I’m confused.. is the child and dependent care credit the same as the dependent care fsa account? My question is regarding a dependent care fsa account.

[ColeenD3]

Yes, the two are intertwined. Your FSA pays your child care provider. Since she is not eligible to be a child care provider, she can't be "the payable nanny for your DCA".

[Opus 17]

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@Unclesamlovesyou wrote:

I’m confused.. is the child and dependent care credit the same as the dependent care fsa account? My question is regarding a dependent care fsa account.

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The eligibility rules are the same.  The rules for qualifying expenses, qualifying children, and qualifying care provides, are the same for both.