Child care expense question: We pay our Mother (child's grandmother) $850 a month to watch our baby. Can we count this as a childcare expense?

[Berl]

Hi Critter i did read all the responses and none of them mentioned if the childtax credit and dependent care expenses can be taken together. So if am missing any thing can you direct me to where the right answer is

[xmasbaby0]

@Berl   The child tax credit and childcare credit are two completely different and separate credits, so the answer is yes, it is possible to get both.

[xmasbaby0]

@Berl 

https://ttlc.intuit.com/questions/1900923-what-is-the-child-tax-credit

https://ttlc.intuit.com/questions/1900643-what-is-the-child-and-dependent-care-credit

[Pixibelle9]

What if I don't claim the dependent care credit? What does grandma need to do when it is tax time? We have paid her monthly.

[Opus 17]

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@Pixibelle9 wrote:

What if I don't claim the dependent care credit? What does grandma need to do when it is tax time? We have paid her monthly.

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If you pay a person in your home, most of the time they are your household employee and you must give them a W-2 and pay the household employee's tax (social security and medicare).  If they work in their home, then most of the time they are self-employed and are expected to file a self-employment tax return.

Taxes are mostly run on the honor system.  The IRS expects people to follow the rules, but they also know stuff happens under the table, and less than 1% of tax returns get audited.  If neither you nor the other person makes waves, the odds are you won't get caught.  But that's not legal advice.

[AmeliesUncle]

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@Pixibelle9 wrote:

What if I don't claim the dependent care credit? What does grandma need to do when it is tax time? We have paid her monthly.

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The same thing as if you did claim the Dependent Care Credit.   She is required to report all of her income.

[Lakewater]

Thank you so much for the helpful discussion.

I pay my mother to care for my children while I work. I know that I don't need to pay FICA for her, but my dad (who does their taxes) is arguing with me that he then needs to pay both the employee and employer portion of FICA since I'm not paying it. That makes no sense to me. It's my assumption that no FICA is owed by either employee/child or employer/parent in this situation, but I can't find verification of that on IRS site. Any help would be appreciated.

TIA!

https://www.irs.gov/publications/p926#en_US_2020_publink100046623

[Hal_Al]

TIA, if she works in your home, no social security or medicare (FICA) tax is due (the grandparent exception to the nanny tax).

If she works in her home, she is not a "nanny" (household employee). She is self employed and must pay both the employer and employee share of FICA.  But, she can deduct expenses including the day care provide vesion of a home office. 

[Opus 17]

If she works in your home, she is your household employee.  Because she is your parent, you are not required to pay the household employee tax (nanny tax) -- which is the employer half of SS and medicare -- and she does not have to have withholding.  If you paid more than $2200, you are supposed to issue a W-2 (her wagged would be in box 1 and boxes 2-6 would be blank) but she can report the income even if you don't issue a W-2.  The income is added to her other income on line 1 of 1040 with "HSH" written next to it.  Household employee income is probably in the "other income" section of Turbotax or you can use the Find function to go to the right page. 

[AmeliesUncle]

Even if she watches the child in her own home, she really does NOT have a "business" if she only is watching her grandchild.  It would be reported as "other income" (similar to a hobby).

[Lakewater]

I forgot to specify that she watches my children in my home, so definitely falls in the "household employee" category.

Thanks all for your input.

[Waynefr456]

But the nanny still has to pay the employee portion of the FICA when she reports the income as other income, doesn’t she?

[Hal_Al]

@Waynefr456 

This discussion/thread is about the parent of the parent (the child's grandparent) providing child care, so the answer is no. No FICA is due when the grandparent sits in the parent's home.

If you're asking about a non related Nanny, then the answer is yes, sort of.  The parent is the employer and is required to pay both the employer share and withhold the nanny's share of FICA.  In may cases, the parent pays both shares, which is an option

[cbusa]

If a taxpayers parent babysits their grandchildren in the taxpayers home and the taxpayer pays their parents/child’s grandparents they are exempt from nanny tax? Does the taxpayer need to 1099 their parent for amounts paid? Is the taxpayer able to claim these amounts paid as care expenses in terms of the dependent care credit?

[Opus 17]

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@cbusa wrote:

If a taxpayers parent babysits their grandchildren in the taxpayers home and the taxpayer pays their parents/child’s grandparents they are exempt from nanny tax? Does the taxpayer need to 1099 their parent for amounts paid? Is the taxpayer able to claim these amounts paid as care expenses in terms of the dependent care credit?

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If the caregiver works in your home, they are your household employee.  You are required to collect and pay the nanny tax unless an exemption applies.  You ARE exempt from paying the household employee tax (nanny tax) if the employee is your parent.  You are not required to withhold federal and state income tax, but you may if you want to.  You must issue the employee a W-2 at the end of the year.  There are several web sites that will issue an electronic W-2 to the employee and e-file the required W-2 and W-3 copies to the IRS and social security administration for a small fee, usually around $5.  

You would never issue a 1099-MISC or 1099-NEC.  If the caregiver is working in their home, they are an independent contractor and are responsible for their own taxes.  Only businesses have to issue 1099s, private individuals do not.  If they are working in your home they are a household employee and you must issue a W-2 if you pay more than $2200 over the year.  If you pay less than $2200, you do not need to issue a W-2, but the employee must still report their income.  

To claim the child and dependent care credit, you must pay a qualifying caregiver to care for a qualifying dependent while you (and your spouse if married) are working.  A grandparent can be a qualifying person for the dependent care credit; however, the grandparent is not a qualifying person if you can claim the grandparent as your dependent (such as because they live with you or you provide most of their financial support). If you are audited, you would need receipts or canceled checks to show what you paid to the grandparent for childcare.   You need the caregiver's social security number to claim the credit.  The IRS will use that SSN to look for matching income on the caregiver's tax return.