Planning to use Dependent care FSA to pay grandparents for taking care of kid at our home in cash. Should I or them need to show anything on paper in terms of tax filing?

[patgada]

I will be paying as a gift for the service, they not charging explicitly. So, want to make sure there won't be burden (w/ federal, ssn deduction) to them wrt tax filing.

[TaxGuyBill]

If you are paying them for services, that is NOT a Gift.  Also, you can NOT use a FSA to give Gifts.

Then need to report the income.  If it is in your home, they are probably a "Household Employee".  

Unless you are divorced (and not remarried) or widowed, Social Security tax, Medicare tax and Federal Unemployment usually do not apply.  So you technically would not need to file a W-2 for them.  However, it will be easier for your parents if you do file a W-2 for them.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p926#en_US_2017_publink100086740">https://www.irs.gov/publications/...>

[ghost]

I would expect the grandparents to consult their tax advisor as to the effect this additional income will have on their situation. Additional income can have effects other than additional income tax such as qualifying for government aid or rent rebates, etc.

[Opus 17]

First, you will have to provide some kind of documentation to show to the FSA provider to get them to release the funds.  The FSA trustee can't release funds without due diligence that the expenses are legitimate.

Second, you will need to report the care providers' name, address and SSN on your tax return so that the expenses are qualified on form 2441.  

Third, as a result of #2, the IRS will look for matching taxable income on your parent's tax return. Whether or not they owe tax and how much will depend on their other tax facts.

[patgada]

Thanks. So, based on dependent care FSA paying to grandparents is an eligible expense, so what kind of documentation will they need except the name, tax number of the parents? Also, they are retired so do not have any other income source, so still this FSA amount will owe tax?

[Opus 17]

If they provide care in your home they are your household employees and you give them a W-2 for their earnings. If their only other income is social security, the wages from providing care will not be large enough to be taxable.


If they provide care in their home they are self-employed or independent contractors.  You don't have to give them any paperwork, they are responsible for keeping their own records and reporting their own income.  They will owe 15% self employment tax on their net profit, but won't owe income tax if this is their only taxable income.

<a rel="nofollow" target="_blank" href="https://www.irs.gov/taxtopics/tc756">https://www.irs.gov/taxtopics/tc756</a>

<a rel="nofollow" target="_blank" href="https://www.nytimes.com/2015/03/14/your-money/contract-worker-or-employee-tax-liability-rests-on-the...>

[jill7]

This is very helpful. I am in the same situation; however, my parents, though retired, do have additional income other than Social Security (e.g. dividend income, pension, etc). How should they report this income if they are independent contractors (i.e. watch my child at their home) and how will it be taxed (i.e. as ordinary income or as self-employment tax?). Any info you can give me about this is greatly appreciated!

[Critter]

If they are new to being self employed and are  acting as their own bookkeeper and tax preparer they need to get educated ....  

If you have net self employment income of $400 or more you have to file a schedule C in your personal 1040 return for self employment business income. You may get a 1099-Misc for some of your income but you need to report all your income.  So you need to keep your own good records. Here is some reading material……

IRS information on Self Employment….
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center 

Publication 334, Tax Guide for Small Business
http://www.irs.gov/pub/irs-pdf/p334.pdf 

Publication 535 Business Expenses
http://www.irs.gov/pub/irs-pdf/p535.pdf 

Home Office Expenses … Business Use of the Home

https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction

https://www.irs.gov/pub/irs-pdf/p587.pdf

There is also QuickBooks Self Employment bundle you can check out which includes one Turbo Tax Self Employed return and will help you keep up in your bookkeeping all year along with calculating the estimated payments needed ....
http://quickbooks.intuit.com/self-employed

Self Employment tax (Scheduled SE) is generated if a person has $400 or more of net profit from self-employment on Schedule C.  You pay 15.3% for 2017 SE tax on 92.35% of your Net Profit greater than $400.  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  You do get to take off the 50% ER portion of the SE tax as an adjustment on line 27 of the 1040.  The SE tax is already included in your tax due or reduced your refund.  It is on the 1040 line 57.  The SE tax is in addition to your regular income tax on the net profit.
 


PAYING ESTIMATES
For SE self employment tax - if you have a net profit (after expenses) of $400 or more you will pay 15.3% for 2017  SE Tax on 92.35% of your net profit in addition to your regular income tax on it. So if you have other income like W2 income your extra business income might put you into a higher tax bracket.

You must make quarterly estimated tax payments for the current tax year (or next year) if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits. 
 
- 2. You expect your withholding and credits to be less than the smaller of: 
    90% of the tax to be shown on your current year’s tax return, or 
  100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

To prepare estimates for next year, You can just type W4 in the search box at the top of your return , click on Find. Then Click on Jump To and it will take you to the estimated tax payments section. Say no to changing your W-4 and the next screen will start the estimated taxes section.

OR Go to….
Federal Taxes or Personal (H&B version)
Other Tax Situations
Other Tax Forms
Form W-4 and Estimated Taxes - Click the Start or Update button

[LQT]

Can you reconfirm if it is mandatory to issue a W2 to my mother (our household empoyee) if I use Dependent Care Flexible Spending Account to pay her for babysitting in our home? Given, she lives with us with no other income.

Thanks, 

[xmasbaby0]

@LQT "she lives with us with no other income..."

Do you claim your mother as a dependent on your own tax return?  If you do, then you cannot use her as a childcare provider to get the childcare credit on your tax return--you cannot claim a dependent as your childcare provider in order to get the childcare credit or to use the FSA money.  

Please scroll up in this thread to review the responses already provided by TaxGuyBill and Opus regarding giving your mom a W-2 as a household employee and her requirement to file a tax return reporting the babysitting income.

[Hal_Al]

Simple answer: It is NOT mandatory that you issue your day care provider a W-2.  It is mandatory that you report her name, SS#, and the amount you paid her on IRS form 2441, which is filed with your tax return when you use tax free FSA benefits (or claim the day care credit).

As the other replies indicate, there are other complications and issuing her a W-2 helps reduce those.  The fact that she has no other income, impacts whether she has to file a tax return and whether you may hear from the IRS about your FSA benefits.

If you paid her more than $4200 for 2019, she cannot be your dependent (she fails the income test). 

[oronia]

Hello,

Thanks for all the great advice on this thread. I'm trying to better understand the way the dependent care FSA works to ensure I'm compliant with all tax rules. This is the first year my kids have not been in a daycare facility due to a recent move. My mom has been helping for several months with the kids care while my husband and I work from home.

She is married, retired and only obtains social security income, in addition to what we've been paying her. Our company allows for $5k/yr of dependent care FSA reimbursement. As she's considered my "employee" per the definitions below (since she's working at our home), am I obligated to provide her a W2? Her reimbursement of $5k should keep her well below the threshold of requiring to file, but are there other implications I'm unaware of if we submit for reimbursement of the $5k at the end of the year. My brother currently claims my parents as dependents. Would they be ineligible for that next year? thanks in advance!

[Hal_Al]

$5000 is more than $4200, the income limit for a dependent.  Your brother would not be able to claim your mother as a dependent anymore.  I assume her husband is your father and he also only has social security as income and does not need to file.  So, your brother can still claim him.

The discussion in this thread, above, covers whether you  have to give her a W-2 . 

[stucknat]

I know the questions in this discussion seem repetitive but the experts hopefully understand our intention to do the right thing and how confused us poor souls are. Here's my situation,

I am hoping to use DCFSA to pay my mother (a widow) $2500 for babysitting in our home this year. She has no other income and is not claimed as dependent by anyone.  Given that she lives with us with no other income, my understanding is that I don't need to deduct any taxes (including SS and Medicare) and I don't need to give her a W2. My question is, does she owe any SS/Medicare/Federal/State taxes on $2500 income in 2020?

[Hal_Al]

Q. Does she owe any SS/Medicare/Federal/State taxes on $2500 income in 2020?

A.  No, as discussed above.  Also, as discussed above, there is a weird exception.  She owes  SS/Medicare if you (the parent with the DCFSA) are divorced (and not remarried) or widowed,

Your description of your situation brings up a question you didn't ask.  Why isn't your mother your dependent?  She lives with you and has no income.  

A person, who can be your dependent (whether they are actually your dependent or not) can not be a qualifying care provider for purposes of using DCB/DCFSA or claiming a dependent care credit. From the instructions for form 2441:

"The person who provided the care wasn't your
spouse, the parent of your qualifying child, or a person
whom you can claim as a dependent."