Daycare FSA - Grandparent

[Anonymous]

Hello,

I am planning on using the Daycare FSA to pay a grandparent for providing childcare in their home.

I have two questions I can't seem to find the answer to:

1. How does the grandparent claim the income on their taxes?
2. How do I claim the payment on my taxes?

Thank you.

[Opus 17]

1. If the  care is provided in their home, they are considered self-employed, and they report their income on schedule C.  They can deduct ordinary and necessary expenses, if any.  (See here https://www.irs.gov/forms-pubs/about-publication-587).  They pay self-employment tax on the net profit and may pay income tax depending on their other income.

2. On your tax return, you report the name, address and tax ID number (social security number) of the care provider, along with the amount paid for qualified care.  Remember that care is only qualified if the child is under age 13 and the care is provided so that you, and your spouse if married, can work.

You will also need to ask the FSA administrator what kind of proof they will want to see before they release the funds.  You may need to provide them a statement or receipt from the caregiver (your parent). 

[Anonymous]

Thank you!

How would that change if they came to our house to provide care?

[Opus 17]

Generally speaking, if someone provides care in your home according to your schedule, they are your household employee.  There is a special rule that if the household employee is your parent, you are not required to withhold or pay household employee tax (social security and medicare) or issue a W-2.  However, there is also an extra special exception to the special rule.  If you meet both of these two tests, then you must issue a W-2 and withhold and pay household employee tax on schedule H on your tax return.

1. Your parent cares for your child (including an adopted child or stepchild) who is either of the following.

   i. Under the age of 18.

   ii. Has a physical or mental condition that requires the personal care of an adult for at least 4 continuous weeks in the calendar quarter services were performed.

Your marital status is one of the following.

1. You’re divorced and haven't remarried.

2. You’re a widow or widower.

3. You’re living with a spouse whose physical or mental condition prevents them from caring for your child for at least 4 continuous weeks in the calendar quarter services were performed.

If you meet both tests, you issue a W-2 and your parent reports the W-2 on their tax return along with their other income (if any) and they pay tax depending on their overall situation.

If you don't meet both tests then you don't issue a W-2.   Your parent reports the income as household employee wages not on a W-2 (there is a place for this), and they pay income tax depending on their overall situation.

In both cases, you would still report their name, address and tax ID number to claim the credit, and in both cases you would have to ask the FSA administrator what kind of documentation they require to release the funds.

https://www.irs.gov/publications/p926#en_US_2023_publink100086740

[Hal_Al]

Q. I am planning on using the Daycare FSA to pay a grandparent for providing childcare in their home. How do I claim the payment on my taxes?

A. Your report the FSA benefits and child care expenses in Part III of form 2441. TurboTax (TT) handles this fairly smoothly. Your FSA-dependent care benefits (DCB) come from line 10 of your W-2.  Your enter the payments under deductions and credits/Child and Dependent Care Credit (even though, technically, you are not actually claiming the Dependent Care Credit (DCC). 

[Anonymous]

Thank you!

I had a quick question:

"Your parent reports the income as household employee wages not on a W-2 (there is a place for this), and they pay income tax depending on their overall situation."

Do you know the exact section or process for documenting household employee wages?

[Opus 17]

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@Anonymous wrote:

Thank you!

I had a quick question:

"Your parent reports the income as household employee wages not on a W-2 (there is a place for this), and they pay income tax depending on their overall situation."

Do you know the exact section or process for documenting household employee wages?

---

Most household employees will receive a W-2, like any other employee, and enter it the same way.

In one of these special situations where the household employee is a relative and no W-2 is issued, the wages are written down on line 1b of form 1040.  If you are using Turbotax, I believe there is an interview section for "other uncommon income" and it should be there. 

[Hal_Al]

In TurboTax (TT), enter at:
- Federal Taxes tab (Personal in  Home & Business)

 - Wages & Income

Scroll down to:

-Less Common Income

      -Misc Income, 1099-A, 1099-C

       - On the next screen, choose – Other reportable income  not already included on a W-2 or 1099

        - On the next screen, click yes, then continue (note that the first item listed is "Wages earned as a household employee")

         - On the next screen enter the amount (ignore the $2400 limit, as it doesn't apply to grandparents)