If you are claiming that you paid money to the relative then you have to provide the person's Social Security number or Tax ID to the IRS on your return when you claim the childcare credit, so yes, your relative then has to file a tax return and show the self-employment income earned from babysitting for you. But it sounds like no money changed hands.....
And...are you claiming this relative as a dependent on your tax return? You cannot use a dependent as the childcare provider that you enter on your tax return.
not only will they have to pay taxes if the FMV of room and board is above their filing threshold. in addition, since the relative lived in and worked in your house, the relative is regarded as your employee. To take the credit you would need to provide them with a w-2 and file schedule H and form 2441 with your return. form 2441 is used to take the credit. In addition, you needed to file to pay your state's UC taxes. if you take the credit, you need to report the relative's name, address, and SSN., and FMV of what you provided on the 2441. the IRS is likely to crosscheck what you report with the relative's return. you may want to consult with the TurboTax tax pro because the w-2 is late. just because you decide you're not going to take the credit does not relieve you of the responsibility of reporting their compensation, if required.
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you may not need to pay fica or medicare taxes on the compensation to the relative if the relative is a parent of either you or your spouse
from IRS publication 926
Don't count wages you pay to any of the following individuals as social security or Medicare wages, even if these wages are $2,300 or more during the year.
3. Your parent. Exception: Count these wages if both the following conditions apply (a and b).
a. Your parent cares for your child (including an adopted child or stepchild) who is either of the following (i or ii).
i. Under the age of 18.
ii. Has a physical or mental condition that requires the personal care of an adult for at least 4 continuous weeks in the calendar quarter services were performed.
b. Your marital status is one of the following.
i. You’re divorced and haven't remarried.
ii. You’re a widow or widower.
iii. You’re living with a spouse whose physical or mental condition prevents him or her from caring for your child for at least 4 continuous weeks in the calendar quarter services were performed.