Grandparent providing childcare

[mcb56]

I am a grandparent who lives with my daughter's family and provides childcare for her children. I report this $3000 as miscellaneous income and she claims the dependent care credit. I am otherwise retired and collect Social Security and a small pension. The $3000 is my only earned income. Would I be eligible to contribute to my Roth IRA? Would I also be eligible to claim the Earned Income Credit? It appears that I can according to the turbo tax software. 

[KrisD15]

Yes, if you are reporting the income as earned income which would require you to file Schedule C and pay Self-Employment tax unless you are an employee and get a W2, you would be eligible to use that income towards the Earned Income Credit. 

As a note, if your daughter claims you as a dependent on her tax return, she cannot use the funds she pays you as childcare expense for a credit on her return. 

Link to similar question

[mcb56]

Your answer is confusing. My understanding is that income earned by a grandparent babysitting their children is not subject to the nanny tax or self employment tax. Previous questions on this subject indicate that the income is reported under miscellaneous income, other wages and that a w-2 is not required

[KrisD15]

Yes, it is complicated, and confusing.

If you are an employee, and your daughter is your employer, you would be paid on a W2 HOWEVER she would not need to include any FICA tax on your wages.  

So that is true, no Nanny Tax.

She would file Schedule H. 

If you are paid cash or on a 1099-NEC or 1099-MISC, technically you would need to file Schedule C as self-employed. 

"Special rules apply to workers who perform in-home services for elderly or disabled individuals (caregivers). Caregivers are typically employees of the individuals for whom they provide services because they work in the homes of the elderly or disabled individuals and these individuals have the right to tell the caregivers what needs to be done. These services may or may not be provided by a family member. If the caregiver employee is a family member, the employer may not owe employment taxes even though the employer needs to report the caregiver's compensation on a Form W-2. See Publication 926, Household Employer's Tax Guide for more information. However, in some cases the caregivers are not employees. In such cases, the caregiver must still report the compensation as income of his or her Form 1040 or 1040-SR, and may be required to pay self-employment tax depending on the facts and circumstances."

IRS LINK

[mcb56]

I appreciate your attempt to answer my question but you are misunderstanding what I am asking. I already know that a grandparent is not subject to the nanny tax and can report their income as miscellaneous income. My question is does this earned income allow them to make a roth contribution and be eligible for the earned income credit.  Turbo tax processes it in such a way to make them eligible for both the earned income credit and to use that earned income to contribute to a roth account. Is this correct?

[DaveF1006]

Actually you need to enter baby sitting income as self-employed income that is subject to the self-employed tax. This is substantiated in the following Turbo Tax post written by Carl. Once done however, you are eligible for the earned income credit as well as a Roth Contribution. To report the income, go to:

1. Go to federal>income and expenses>
2. Self-Employment>Self-employment income and expenses
3. Complete the profile that asks about your business
4. Then there will be a screen where you will enter your self-employment income.

At this point, you may wish to make a decision to deduct expenses against your self-employment income. This would lessen your self-employment tax but would lower your saver's credit, the amount that you can contribute to a Roth, and the EITC credit because there is less income to count toward the credits. Your SE tax would be approximately $425 based on $3000 worth of income. Obviously, your SE tax would be less with less income that is reduced by expenses but the downside is that there is less income for the credits and Roth contribution. You can work it both ways to see how this would benefit you.

[mcb56]

Thank you for your thoughtful reply. I have a follow-up question. I thought that there was an exception for Grandparents providing childcare for their grandchildren. When I filed my 2020 taxes with turbo tax I listed it as other earned income "grandmother babysitting grandchild HSH" and turbo tax included it on line 8 of the 1040 as wages. So I did not show it as self employment income nor did I pay SS taxes. I don't have a business. I just babysit my own grandchildren in the home in which we all live. If I don't pay self employment taxes on this income does it preclude it from being included in a roth contribution? and earned income credit?

[ThomasM125 · Accepted solution]

@mcb56

You would have to pay self-employment or social security tax on the income for it to be considered earned income. Virtually all earned income is taxed for social security/self-employment tax.

If it appears on line 8 of your form 1040 it would not be considered earned income, so you could not qualify for a ROTH IRA contribution based on it.

[five05harts]

Hello, I provide full time child care for my two toddler grandchildren, in my home. I am paid biweekly (I left my full time job to provide this childcare ) , thus why I am paid. I pick the children up, transport them to my home , provide their meals, toys, learning activities, personal care then drive them back to their home at the end of their parents workdays. How would I report this income and how would their married , both full time employed  parents report the babysitting expenses?
Thank you , Christine 

[MarilynG1]

You can report the income you earned babysitting your grandchildren in your home as Self Employment Income.

You can also claim expenses against this income; click this link for more info. 

The parents report their Dependent Care Expenses in this topic, under the Deductions & Credits section. 

Here's How to Claim the Child Care Credit. 

[five05harts]

Thank you !