Dependent FSA expense paid to relative

[shahumang18]

I paid my parent to take care of my son. I had DFSA through employer. I used the form to disburse the amount from my DFSA and paid to my parent via Cash. I do understand that in order to take the credit of child care expense I have to enter my parent's SSN and other required information. Now, does my parent has to report this as income? If yes, what would be the income type? Misc. or Self-Employment? I did not provide my parent W-2 or 1099. My parent is not running this as a business and not working as a full time or part-time baby sitting. Parent is just helping us while we are not home. Can someone please help me understand what type of income do my parent has to report on their tax return. They don't have any other income other than Social Security for 2023. 

[DianeW777 · Accepted solution]

Yes, your parent must claim the income.You do not need to supply any tax form. A parent is an exception to the household employee tax requirement (so called "nanny tax"). But the income IS taxable to your parent(s), particularly if you plan to claim the child and dependent care credit.  You must use their SSNs and address as you indicated. 

If it was done in your home, then your parent should follow the procedures below which eliminates the self employment tax:

1. Click on Wages and Income 
2. Scroll down to Less Common Income 
3. On Miscellaneous Income, 1099-A, 1099-C click the start button
4. On the next screen click the start button on Other Income not already reported on Form W-2 or Form 1099
5. Answer Yes on the next screen and enter the amount under Household Employee Wages. Enter the full amount received
6. Continue until you have finished this section.

  It would be self employment if the care was done in their home. 

If they meet the filing requirement, this income would be included. Use the link below to see if they are required to file and add half of the social security plus all other taxable income.   Do I need to file a federal return this year?

@shahumang18

[Edited: 02/28/2024 | 7:51 AM PST]  

[shahumang18]

Thank you so much for the explanation. Makes total sense. I wasn't sure which one to choose to report their income, Self-Employment or Misc. But you answered right on spot. They were taking care of my son in my home. I am going to report is as "Other income" now. 

They are going to file return, since they don't owe anything and not getting any refund. This is just to have on records incase some state agencies ask for return for Medi-cal or other programs. 

[shahumang18]

I was able to locate the Misc section to report the income however, I see that there is limit of $2700 is mentioned in there. It says that if the reporting income is more than $2700 then W2 should be provided. Do you know if I can report the income as "Other reported income" vs. "Misc income not reported on W2". 

[RobertB4444]

The parent exception kicks in here.  It's ok.  You can report it as Miscellaneous income either way.

@shahumang18 

[dc422]

Hi. I’m also under the same boat but I don’t think the parent exception would kick in for me because 1) my child is under 18 and 2) I’m divorced. In that case can my parents still report the money (about $4k) I paid from dada as other income? They are also not running a nanny business and they are taking care of my son at my house. Thanks!

[RogerD1]

Are you planning to claim the Child and Dependent Care Credit?  Keep in mind that this credit is only for money paid for child care for children under the age of 13.

The $4000 paid to your parents does count as their income and should be reported using the instructions provided by @DianeW777 above.

It's unclear as to the source of the $4000.  If you paid the $4000, then you could claim the Child and Dependent Care Credit on your taxes assuming you meet the requirements.

The IRS provides an interactive tool at the following website to determine your eligibility to claim the Child and Dependent Care Credit - IRS Child and Dependent Care Credit .

[dc422]

Thank you.

no, im not claiming the credit because the $4k comes from DCFSA