You have options in this scenario since you are a grandparent of the children.
If you wants to claim the earned income credit, get credit for Social Security benefits, or have earned income for the purpose of making IRA contributions; or if your children want to claim the Dependent Care Credit, you can report the income in one of two ways:
- Report the income you received as a contractor (self-employment). You will track your income and expenses and report the income as self-employment on Schedule C with your tax return.
- You could be classified as a household employee (since you watch the kids in their home). The nanny tax rules do not apply since you are a grandparent. In this case, your kids would issue you a W2 and they would file a Schedule H with their tax return. If you choose to classified as a household employee, this article will be helpful in further explaining the details of Schedule H and Household Employment Tax.
If your kids are not claiming the Dependent Care Credit, you could report the income as Miscellaneous Income and would describe the income as babysitting grandchildren and the amount so the IRS will not think you is in the babysitting business.
Additional Info from the IRS Site:
Paying Grandma for Childcare
It can be hard to view your mother as either an employee or an independent contractor, but for purposes of the IRS, she falls into one category or the other if she is being paid to babysit your children. Because your mother is your parent, grandma has no nanny tax that would make her responsible for paying both Social Security and Medicare taxes of 15.3 percent on her babysitting earnings. However, this income is still subject to taxation, depending upon how much money she earned during the year in total. For IRS income minimum filing thresholds, refer to IRS Publication 17, Your Federal Income Tax For Individuals.
If your mother babysits at her home, then she is considered an independent contractor, and you should issue her an IRS FORM-NEC at the end of the year totaling the amount she has received for babysitting. The IRS requires payers to submit 1099-MISC when they pay an independent contractor more than $600 in a calendar year. In turn, she is responsible for reporting this income to the IRS if it exceeds $400 per year. She is, however, able to deduct certain expenses associated with babysitting, such as snacks or meals provided to the children. See IRS Publication 587, Business Use of Your Home (Including Use by Daycare Providers), for more information regarding possible daycare-related deductions.
When your mother babysits at your home, she is technically a household employee, however, you will not have to withhold FICA (Social Security and Medicare) taxes on this income, and she will not have to pay FICA taxes because she is your parent. But, she will still possibly have to report this income if she is required to file taxes for the year. You do not have to issue her a W-2 at the end of the year if you decide not to withhold FICA taxes, but it is a good idea to officially have her on the payroll. Then, she is required to report this income – and pay FICA as well as income taxes – if you claim the Child and Dependent Care Credit.
How Do I Report the Money I Pay My Mom for Babysitting on My Taxes?
If you plan on claiming the Child and Dependent Care Credit, then you must supply the Social Security information of your child care provider to the IRS. Because you are claiming this credit, you are no longer exempt from the nanny tax, and your mother will be responsible for reporting her income as well as paying her portion of FICA taxes. If you qualify for the credit, you need to complete IRS Form 2441, Child and Dependent Care Expenses, and Form 1040 or Form 1040A, U.S. Individual Income Tax Return.
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