Dependent Care Credit - Grandparent being pain in cash

[CB_Tex]

In 2021, we paid my mother in law $13,000 in cash to provide child care in our home. From my understanding, this can be used to claim the Dependent Care Credit.

To do this, we must:

1. Check the Turbo Tax box that she is a "household employee"

2. Clearly identify her using her SSN

3. She will need to claim this money as other income and it will be subject to Federal Tax, but not FICA as she is a grandparent. (I typically help her do her taxes also, so help explaining what she needs to do is helpful).

Is there anything I am missing?

From my understanding, I do not have to issue a W-2 or 1099, correct?

Thanks in advance.

[GeorgeM777]

Yes, you can claim the Child and Dependent Care Credit provided you paid your mother-in-law to care for one or more of the following people: 

• A child age 12 or younger at the end of the year whom you claim as a dependent on your tax return.
• Your spouse, if that person is unable to take care of himself or herself and has lived in your home for at least half the year.
• Any other person claimed as a dependent on your return, if that person can't take care of himself or herself and has lived in your home at least half the year.

Additionally, because it appears you are married, you and your spouse must have earned income such as wages earned from a job.  Investment income, such as dividends and capital gains would not count as earned income.  You must also have paid for the care so that you and your spouse could work or look for work, and you must also file a joint return.  

With regard to the amount you paid your mother-in-law, consider that for 2021, total expenses you use to calculate the credit may not be more than $8,000 for one qualifying individual or $16,000 for two or more qualifying individuals. Thus, in your situation, if the amounts you paid were for just one qualifying individual, you would not be able to figure the credit using more than $8,000 as total expenses. 

Because it appears that your mother-in-law provided childcare in your home rather than her own home, she is your household employee.  Generally when the household employee is a parent, there is no requirement on the part of the parent to pay FICA taxes.  However, in your situation, because you are claiming the Child and Dependent Care credit, your mother-in-law is no longer exempt from paying FICA taxes, in addition to whatever income taxes there may be.   

Generally, when you hire an independent contractor and pay such person $600 or more for services in a tax year, you are required to issue that person a 1099-Misc.  However, in your situation, your mother-in-law appears to be your household employee and therefore, given the amount you paid her, you would need to issue her a W-2.  

Here is a helpful link to a TurboTax article that explains the Child and Dependent Care Credit.  

Ins and Outs of the Child and Dependent Care Tax Credit.

[AmeliesUncle]

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@GeorgeM777 wrote:

However, in your situation, because you are claiming the Child and Dependent Care credit, your mother-in-law is no longer exempt from paying FICA taxes, in addition to whatever income taxes there may be.   

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Claiming the Child and Dependent Care Credit has no effect on whether or not the mother-in-law is subject to FICA.  As you pointed out, the grandparent is usually exempt (unless the parent is divorced and not remarried).

[AmeliesUncle]

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@CB_Tex wrote:

Is there anything I am missing?

From my understanding, I do not have to issue a W-2 or 1099, correct?

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Your State MIGHT require state unemployment insurance and/or worker's compensation insurance (and possibly other state requirements).

The IRS Publications are possibly conflicting about whether or not a W-2 is required (and I haven't dug into the Regulations about it), but it is easier for her to report if you DO file a W-2.  And it should be showing up on Line 1 of her 1040 (as 'wages'), not as "other income".