Paying grandparent for babysitting (DCFSA) and tax return question

[niraman]

Hi,

With the pandemic in 2020, I didn’t send my kid to daycare for the most part of year. I stopped contributing to my Dependent care FSA (DCFSA) mid-year as soon as we were allowed to do that, but I had already contributed $2500 by then. I have receipts from daycare from first couple months of 2020 which totals to $1950.  So my question is basically around getting remaining $550 from DCFSA. My mother-in-law is visiting us and I am thinking to pay her for babysitting for couple weeks and use her details and SSN for claiming $550.

She is a greencard holder and she stays with us whenever she is in USA (She spends most of the time in India). She has no other source of income and has not filed any tax returns in USA till now. Since I’ll be submitting receipt to claim $550 from FSA, and would be including that in my tax return (form 2441) as well, do I really need to issue W2 to her as our household employee and/or any other things that I need to consider? Also since $550 would be her only income in 2020, does she need to file tax return?

She is not being claimed as dependent on my or my brother-in-law's tax return.

[Opus 17]

First of all, the money may already be lost.  Unless your employer plan already allows for a grace period or carry forward, the money is gone.  If your plan allows for a carryforward of the unused balance, you have until the end of the carryforward period to spend the money.  You may want to check with the plan administrator first to see if care paid for in January or February 2021 is eligible for reimbursement.  (If it is, it will be reported on your 2021 tax return next season, not this year.)

Then, care is only a qualified expense if provided so that you, and your spouse if married, can work or look for work. 

You are allowed to pay your parent (the child's grandparent) for care and get reimbursement.  You will need to show some documentation to the plan administrator, probably including a W-9 form reporting her social security number.  Since she will be living in your home, she is your household employee, but you are not required to issue a W-2 as long as the wages are less than $2,200, and you are not required to withhold or pay household employee's tax since she is your parent.  Lacking any tax reporting paperwork, your mother would be on the honor system to report this income and pay tax on it.  If this is her only income it would not be taxable even if reported.  (As a green card holder she is required to file a US tax return and report and pay tax on all her world-wide income, I'm surprised she has no other income anywhere.  Maybe stays with other relatives.  Not really a part of this question.)

[niraman]

thank you for the reply @Opus 17 . This is for the expenses in Dec 2020, so I have till March to submit claim to my plan administrator.  They just need name, address, SSN, date and type of services for reimbursing the money.

my mother-in-law stays with us and my brother-in-law when in USA and she has no additional income, and that is the reason for not filing tax returns till now. Since there is no need for issuing w2, not sure how to report this on the tax return for her though.

[Opus 17 · Accepted solution]

You have no tax reporting requirement.

If this is your mother's only income, she does not have a reporting requirement since the amount is less than her standard deduction of $12,300.  The only reason she would be required to file a return is if she is married and her spouse files a US tax return as married filing jointly (in which case they must list all their combined income); or she is married and her spouse files as married filing separately and chooses itemized deductions.  (In that case, she must also file, report the income, and choose itemized deductions even if her deductions are zero.)

You would then need to report the $500 on line 1, with "HH" next to it indicating household employee.  This may be listed under "uncommon income" or it may require a manual entry.  But as explained above, it is likely that she simply is not required to file.

Important!!  I just realized that if your mother has a green card and a valid SSN, she is probably eligible for the $1800 stimulus payment, so she will want to file a tax return this year.  That means you will report the babysitting wages even though it won't be taxable. I think I saw @Hal_Al or @rjs had an explanation of how to enter household employee wages in Turbotax when there is no W-2. 

Also important!!  The IRS will not direct deposit a refund for her unless she has a US bank account in her name and SSN. The IRS will not deposit her refund into your bank account.  If she does not have an account, she can request a paper check.  It can be mailed to her in India and she can deposit it there, or maybe it can be mailed to you and you could forward it to her.  You could request a debit card, but it would have to come to you in the US, and I don't know the best way to transfer the funds to her after that.  

[Opus 17]

Also also important.  If you claim your mother as a dependent (which she may or may not be eligible for, depending on all circumstances), then she will not receive a stimulus payment and is not eligible to be paid from your FSA. 

[Hal_Al]

In TurboTax, enter Household employee wages  at:

 Federal Taxes

Click on Wages and Income

Scroll down to Less Common Income

On Miscellaneous Income, 1099-A, 1099-C click the start button

On the next screen click the start button on Other Income not already reported on Form W-2 or Form 1099

Answer Yes on the next screen. On the net screen, enter your income as Household Employee Wages (ignore the $2200 limit, it doesn’t apply to grandparents) and continue the interview until it completes.

TurboTax puts the amount on line 1 (wages) of form 1040 (line 7 prior to 2018) with the notation “HSH”. It is considered earned income.