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?

[Piccuilla]

We pay my wife’s sister to watch our child at our house but she is 19 and her parents claim her on Taxes. Can we still use the child expenses on our taxes or would that mess up my wife’s fathers taxes? I forgot to mention that this would mostly be under 2k that we paid her last year.

[Hal_Al]

Q. Can we still use the child expenses on our taxes?

A.  Yes, you can claim the dependent care credit.  You will have to provide her SS#. 

Q. Will that mess up my wife’s father's taxes?

A. No. It has no effect because the amount is not enough to change the sister's dependent status, assuming she has little or no other income or is a full time student.

Q. Will effect the sister's taxes?

A.  No. It is not enough to have to file (because she sat in your home)  unless she has sufficient other income.

 A dependent child  must file a tax return for 2021 if he had any of the following:

1.          Total income (wages, salaries, taxable scholarship etc.) of more than $12,550 (2021).
2.          Unearned income (interest, dividends, capital gains, unemployment) of more than $1100.
3.          Unearned income over $350 and gross income of more than $1100
4.          Household employee income (e.g. baby sitting, lawn mowing) over $2300 ($12,550 if under age 18)
5.          Other self employment income over $432, including money on a form 1099-NEC

[rb1997]

So my in-laws watch my kids at their house.  We pay them $125 per week to help us out.  

Obviously we can claim the child care expense.  How does this effect their taxes?

How much would they end up paying in taxes?  It would be $6500 for the year.

This is their only form of income besides social security.

Thanks,

[xmasbaby0]

The childcare is  self-employment income.    You will need to use mom or dad's Social Security number or Tax ID in order to get the childcare credit on your return.   Mom or Dad needs to enter that income on their joint return.

[Opus 17]

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@rb1997 wrote:

So my in-laws watch my kids at their house.  We pay them $125 per week to help us out.  

Obviously we can claim the child care expense.  How does this effect their taxes?

How much would they end up paying in taxes?  It would be $6500 for the year.

This is their only form of income besides social security.

Thanks,

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You don't need to issue them any tax paperwork, but if you want to claim the credit, you will have to enter one or both of their names and SSNs on your return as the caregiver.  (Pick one of them, making it both just makes it more complicated for them.)

On their end, the person you name must report self-employment income on schedule C.  They have the option of deducting a portion of their household expenses (food, utilities, etc.) as "business" expenses related to the business of providing child care.  They will pay self-employment tax on the net profit after expenses, about 15%, so $975 or less.  If this is their only income besides social security, they won't pay income tax on this money, and it won't make their social security taxable. 

[Hal_Al]

The  consensus in this forum is that they need to report the income as self employment. In addition to food and utilities as expenses, they may deduct a portion of mortgage interest (or rent),  real estate tax and maybe even depreciation on a part of the home.  The taxable income (and amount subject to self employment tax) will be much lower than the $6500 they received.

But the opinion that it is self employment income is not unanimous.  Some think that if the grandmother is watching the child in the grandmother's home, then the grandmother should report that income as "other income".  Watching ONLY your grandchild is NOT a business to be reported on Schedule C. That keeps the income from being subject to self employment tax, but then they are not allowed to deduct any expenses.  But, that's not a problem with their low income. 

If you look at the hobby vs business rules, there is almost no way that a grandparent that only watches their grandchild is a business.  

@AmeliesUncle  FYI

[Opus 17]

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@Hal_Al wrote:

But the opinion that it is self employment income is not unanimous.  Some think that if the grandmother is watching the child in the grandmother's home, then the grandmother should report that income as "other income".  Watching ONLY your grandchild is NOT a business to be reported on Schedule C. That keeps the income from being subject to self employment tax, but then they are not allowed to deduct any expenses.  But, that's not a problem with their low income. 

If you look at the hobby vs business rules, there is almost no way that a grandparent that only watches their grandchild is a business.  

@AmeliesUncle  FYI

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I think that's a reasonable argument on its face, although I would like to see an audit result or tax court case. The biggest problem I see if that argument is applied to this case, is that the grandparents most likely would not file any tax return (since SS plus $6500 of hobby income is below the filing threshold).   That would raise a red flag at the IRS because there would be a caregiver claimed by the parent but no corresponding income reported by the caregiver, and the caregiver would get an IRS letter.  They can reply by making the above argument and see what happens.  

[olekingcole001]

I can't find any information about our situation- my mother lived with us in 2021 and we paid her for child care. The care happened in our home, which could make her a household employee, and we moved into a larger house to accommodate her living with us- so we'd be able to claim that expense.

But the care also happened in her home- so if she was able to report it as self-employment, she could deduct some of her portion of the rent, which might be ideal for reducing her tax liability.

[Hal_Al]

@olekingcole001  If she split her child care time between homes, she should treat all the income as self employment. 

[olekingcole001]

Sorry, my explanation wasn’t super clear. She lived with us full-time, so our home was also her home. Not sure how we should classify it, but I would assume we could go with whichever route is most beneficial, which is probably paying her on W-2 as a nanny, and avoid the nanny tax since she’s my mother.

[Opus 17]

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@olekingcole001 wrote:

Sorry, my explanation wasn’t super clear. She lived with us full-time, so our home was also her home. Not sure how we should classify it, but I would assume we could go with whichever route is most beneficial, which is probably paying her on W-2 as a nanny, and avoid the nanny tax since she’s my mother.

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In that situation, I would treat her as a household employee (nanny) and give her a W-2.  This is similar to being an au pair, where the caregiver lives in the family's home.  Another reason for this is that if she was treated as self-employed, she could not deduct household expenses against the business income because she doesn't own the home.  

[olekingcole001]

Super helpful, thanks Opus!

[jrwyles]

I know this post is several years old, but it's the only thing I can find that directly touches on the question I'm looking to answer.  I just want to clarify that you are saying that even if the babysitter of my children is my parent (and I'm married to their father) and is therefore exempt from SS and Medicare taxes, that exemption is void if I claim a dependent care credit? Seems counter-intuitive since they each benefit separate parties, but my mother was just told this by someone authoritative so we are trying to confirm or deny - and exhaustive searches through IRS pubs yielded nothing of the sort. 

[Tinkvick]

So, if I paid my mother $40/week to watch my kids while I’m working no W2 is required? It’s a little under $2200/yr 

[JamesG1]

IRS Publication 503 Child and Dependent Care Expenses, page 8, states:

Payments to Relatives or Dependents 

You can count work-related payments you make to relatives who aren't your dependents, even if they live in your home. However, don't count any amounts you pay to: 

1. A person for whom you (or your spouse if filing jointly) can claim as a dependent; 
2. Your child (including stepchild or foster child) who was under age 19 at the end of the year, even if he or she isn't your dependent; 
3. A person who was your spouse any time during the year; or 
4. The parent of your qualifying person if your qualifying person is your child and under age 13.

IRS form 2241 Child and Dependent Care Expenses requires that you disclose the name, address and social security number of the care provider rather than prepare a W-2.

See also this TurboTax Help.

@Tinkvick