If I use Dependent Care FSA dollars to pay my mother where she provides daycare to my kids so that my wife and I can work, will I need to create a W-2 for her?

[johnnyw22]

Or is there a limit where she would simply need to put that down as income on her tax return but would not need any additional documentation when she files her return?   Also to clarify my mother is not a dependent I'm claiming on my tax return.   I live in Massachusetts as well.

[MaryK4]

You do not have to issue a W2 or 1099-NEC.  Because you will be using the expenses for the FSA, you will be required to report her social security number to the IRS on your Form 2441.  If she is an independent contractor (see the article below), she would be required to report if you pay her more than $400.

See Babysitter Taxes (Who Owes It & How to Pay) | The TurboTax 

[johnnyw22]

Thanks MaryK for your response!   A follow up question I have is I am planning to pay my mother my entire 2020 Dependent Care FSA balance of $2,261.63.  I understand that in my tax return, I will need to report her SSN on Form 2441.  But where does my mother enter this income in her tax return?   She's using Turbotax Premier but none of the income sections stands out for where she would enter this income.   Also, is this amount subject to any additional filing requirements?  I'm a Massachusetts resident as well.   Thanks!

[SamS1]

You mother would need to report this as self employment income.  If she is using premier, she will need to upgrade to TurboTax Home and Business to include it as business income.  Child Care income is considered as self-employment income by the IRS and should be reported on Schedule C.  In addition, you should report any expenses related to your Child Care business on your Schedule C.  In addition to regular income tax, she would would be liable for self-employment tax on the net income.  This is 15.3% and covers social security tax and Medicare tax on net self-employment income.  The additional self employment tax is calculated and added to her return in TurboTax.