Paying Grandparent with Dependent Care FSA, how to report/ do I need to issue 1099-MISC

[rontana1]

So here's my question. Due to Covid we aren't using all of our FSA funds for daycare to pay our typical provider because they shut down for a period of time. My mother-in-law watched our kids in her home for 3 weeks this summer while we were working so we paid her $1,500 for those three weeks. We submitted her name, address, ssn, etc. to our FSA plan administrator and were reimbursed that amount. Now for tax purposes here are my questions:
1. Does our FSA plan administrator automatically report her information to the IRS once they send us our reimbursement?
2. Do I need to issue her a 1099-Misc?
3. If I do issue the 1099-Misc do I file that with the IRS too or just hold it since we're individuals and not a company?
4. Since we won't be claiming the dependent care credit due to use of the FSA funds and not exceeding the amount we allotted do we need to list her on our returns on form 2441 or do we even fill that out at this point? (in past years we'd use all $5,000 of FSA funds and then claim the 20% on the extra $1,000 since our child care expenses pre-covid were always over $8,000).
5. Where does my mother-in-law claim the amount we paid her since she provided the services in her home? Does she need to do a schedule "C" or does she just claim it as other income or somewhere else? She does not run a daycare, just watched her grandkids to help us out so it's not really a profit making endeavor for her.

Thanks, just want to make sure I get this right.

[MaryK4]

The answers to your question- if you have more, just add to this thread!

1. The FSA will not report to the IRS automatically, but they are required to keep the records.

2. You do not need to issue her a 1099-MISC (NEC) because the payments were not made in the course of your business activity.

3.No 1099-MISC is needed.

4.Yes, you will have to provide the Child Care provider information (her social security number) on the Form 2441- when you have the Dependent Care Benefits, you are required to report the information like the Dependent Care benefits.  The extra $1,000 will be taxed as regular income- but Turbo Tax will report the information based on your entries.

5. Your mother-in-law can report as Self-Employment income on Schedule C if it is her trade or business.

[rontana1]

Thanks so much, just for my mother-in-law's clarification if she was just helping us out and she is not a typical daycare provider i.e. not her typical business would she still do a schedule "C" or would she just report it as other income on her 1040? I know with the schedule "C" she could deduct some expenses but I doubt she has kept receipts for juice boxes and mac-n-cheese from the summer lol.   Would there be any benefit to her using the schedule "C" even if it's not her typical business? 

[MaryK4]

When you file a Schedule C, you pay Social Security and Medicare taxes on the net business income (income less expenses).  In general, if it is not self-employment income, it would fall into the category of "Hobby Income".

Earning side income: Is it a hobby or a business?

@rontana1

[WendyN2]

Given that she is a family member, and this is not her normal trade or business, she is not required to file a Schedule C with her Income Tax Return. However, given that you are required to submit her SS# on your return, somewhere down the line, should she be contacted by the IRS regarding this $1,000, it is far better for her to just "nip it in the bud now", so to speak. What I would advise is that she files a Schedule C along with her personal 1040, report the $1,000 in earnings (not reported on a 1099 - there is a line for this) and then in the expenses section, she should itemize certain allowable and completely understandable expenses to offset this $1,000. Having said this, she should ONLY be concerned about paying Self-Employment Tax if she has other (somewhat) significant forms of income. Again, my advice, itemize a portion of the following:

     1.  Cell phone bill

     2.  Fuel for transportation for that time frame (don't use actual mileage then she has to

          detail her vehicle type, year of purchase, etc., etc.)

     3. Any/all food, clothing, toys purchased for the minor child (WITHIN REASON ie - $300

         max)

     4.  "Materials/Supplies" purchased for the minor child (arts/crafts items the child used

          while under her care even if purchased at an earlier time)

This should give you a better idea as to the end result you are aiming for. She would use her name and address, as well as SS#, for the "business" purpose information she will be asked for. This process just really prevents any potential future hassle should the IRS "flag" that $1000 you're claiming.