Dependent Care Credit

[coleehow01]

Good morning,

I thank you ahead of time for taking time to read/answer my question/inquiry.

My mother watches my daughter and gets paid bi-weekly. Her only other form of income is SSI Disability. By me claiming this credit and marking her as the caretaker, how will that affect my mother? She normally does not file taxes (to my knowledge).

Will she need to file taxes if I claim this credit and claim that income? Will she need to pay taxes on that? Income paid to her is $3,120 for the year.

Thank you!

[xmasbaby0 · Accepted solution]

In order for you to claim the childcare credit you have to enter the Social Security number or Tax ID of your childcare provider.  The IRS matches that up with the income reported by the childcare provider, so yes, Mom has to report it.   It will be self-employment income for her and she will pay some self-employment tax on it for Social Security and Medicare.   It should have no effect on her SS benefits.   

She might want to use one of the free software programs offered on the IRS site:

https://apps.irs.gov/app/freeFile/

[coleehow01]

Thank you for your response. I greatly appreciate your assistance with that. I figured that she would have to do so but just wanted to verify.

[DMarkM1]

As @xmasbaby0 states the income does need to be reported by your mother for you to take the credit.  However, she may not have to pay self-employment taxes on it. 

You can exclude wages paid to your parent who is babysitting your child from social security/medicare/unemployment taxes. 

There are exceptions to this exception.  See below for an extract from Publication 926. If you are able to exclude the income from self-employment taxes and therefore do not need a schedule H or a W2 issued, your mother should enter the income on her return as follows:

On the "Wages & Income" tab

1. Scroll down to "Less Common Income"
2. "Show More"
3. "Start/Revisit" Miscellaneous Income"
4. "Start/Revisit"  "Other Income not reported on W2..."
5. Did you receive other wages?"  "Yes"
6. Put in the amount
7. Continue
8. "NO"

Wages not counted. Don't count wages you pay to any of the following individuals as social security or Medicare wages, even if these wages are $2,300 or more during the year.

1. Your spouse.

2. Your child who is under the age of 21.

3. Your parent.

Exception: Count these wages if both the following conditions apply.

a. 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.

b. Your marital status is one of the following.

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

                ii. You’re a widow or widower.

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

[boomtown]

A tip on expenses: for my sister-in-law in this same scenario and awhile ago I figured out that it's best for her to pay the kid's grandma extra in order to cover the cost of meals for the kid.

Every $1 extra paid in 2021 gets credited 50%, and the grandma gets an extra $1 of income plus $1 of expenses, so doesn't pay tax against it. In the end, the mom got 2021 meals for her kid under grandma's care for a 50% discount.

2022 and 2023 will probably both be 35%. Not shabby for helping to feed your kid. Especially with price increases at the grocery store. You do have to make sure that the care-provider (grandma) is "deciding how to care for the kid and what food to buy", otherwise she's just an employee of the mom. It's a technicality but good for everyone to know the rules.

If she had an option for summer camps to either include meals or not, I would advise her to get the meals as long as they aren't upcharged by over 35%!