Nanny Tax Exemption (Grandma taking care of grandkids) and Child Care Credit Claim

[luludeyang]

My mom lives with us taking care of our young kids after they come back from school.  I paid her $5000+ for her help without issuing her a W2.  She will count the $5000 as her income for the 2022 tax return.  Just wondering whether I can enter the $5000 to claim the child tax credit for my tax return.  I remember I saw somewhere that the nanny tax exemption will not be valid if the payment to a "family member" nanny is counted to claim the child tax credit.  Can anyone please advise? Thanks a lot in advance.  

[MonikaK1]

You can claim the Child Care Credit for money you paid for care as long as you meet the other requirements and the person you paid was not one of the following people:

• Your spouse
• A parent of the child being cared for—for example, you couldn't claim the credit if you pay your ex-spouse to care for the children you have together
• Anyone listed as a dependent on your tax return
• Your own child age 18 or younger, regardless of whether they are a dependent on your tax return—for example, you couldn't pay your 17-year-old child to look after an 8-year-old sibling and then claim the credit

Both the employee and employer pay Social Security and Medicare taxes (commonly called FICA) for household employees. This applies if an employer pays cash wages of $2,100 or more to any one household employee. For FICA, both the employer and the employee pay to the IRS 7.65% of wages paid – 6.2% for Social Security and 1.45% for Medicare taxes. An employer generally must withhold the employee's share of FICA tax from their wages.

Employers generally don't withhold or pay FICA taxes on wages they pay to their spouse, a child under age 21, a parent or an employee under age 18 unless performing household work is their principal occupation. But, they need to report the compensation on a Form W-2, Wage and Tax Statement.

If your household employee cares for your dependent who is under age 13 or for your spouse or dependent who isn't capable of self-care, you may be able to take an income tax credit against some of your expenses. To qualify, you must pay these expenses so you can work or look for work. If you can take the credit, you can include in your qualifying expenses your share of the federal and state employment taxes you pay, as well as the employee's wages. 

Please see this TurboTax article and this IRS webpage (Publication 503) for more information regarding the Child Care Credit.

Please see IRS Publication 926 for more information regarding household employees.

[luludeyang]

Thanks for your prompt response. Highly appreciate it!

The caregiver is my mother and she provides help at my house, which makes her income from child care exempt from the SS and Medicare taxes. For this case, can I still enter my payment to my mom to claim the child tax credit?

[Vanessa A]

The caregiver is my mother and she provides help at my house, which makes her income from child care exempt from the SS and Medicare taxes.  This is correct. 

For this case, can I still enter my payment to my mom to claim the child tax credit? Yes, since you paid her $5,000 you would be able to claim the payments for the child and dependent care credit since she cannot be listed as a dependent on your return with income over $4,400.  If you would pay her less than $4,400 and she would be claimed as a dependent on your return, you would not be able to claim the credit.  

[luludeyang]

Thanks so much!

Just want to confirm: will the claim make the SS and Medicare tax exemption invalid?

[Vanessa A · Accepted solution]

No, claiming the Child and Dependent Care credit does not affect the grandmother's exemption from the SS and Medicare taxes.