Grandparents taking care of kid

[dc422]

I am divorced and I am not remarried. I am claiming my son as a dependent. My parents took care of my son and I paid them $4500 out of the money from FSA depende care. How should they report the income? I know that they don't fall under the excemption for medicare and social security tax because they are taking care of my child who's under 18 and that I am divorced and haven't remarried.

Some say that they are house employee and that I need to issue them a w2. I am new to this and I have not done any tax withholding. I simply wrote them checks.

Some say 1099 NEC.

Some say to just report income as "other income"  under Schedule 1 line 8z.

Or should it be self-employment income on Schedule C?

[xmasbaby0]

".....my child who's under 18..."

Is the child they took care of under the age of 13?   You can only get the childcare credit for a child who is 12 or under.

[dc422]

Yes. He’s only 1

[LeticiaF1]

According to the IRS, people that provide child care are considered to be self-employed.  They should report this income on a Schedule C.  They will also be able to include expenses related to the service that they have provided for you.  

They should also provide you with their information because you can claim the Child and Dependent Care Credit on your tax return.  

For more information see the TurboTax help articles below:

Do Babysitters Have To Report Their Income on Taxes?

What is the Child and Dependent Care Credit?

[dc422]

Thanks for your response. I forgot to mention that my parents are living with me. Does that make them household employees or can they still file a Schedule C like you suggested?

Also, based on the first article, do I need to issue a Form 1099-NEC since I paid $4,500? How do I do that? Or is it not necessary?

"This income is basically from self-employment, so families don’t have to issue a 1099 unless a babysitter earns $1,000 or more in a calendar quarter  In this case, you might receive a Form 1099-NEC if you earned between $600 and $2,600 in 2023 or $2,700 in 2024."

[DianeW777]

No. You do not need to supply any tax form. A parent is an exception to the household employee tax requirement (so called "nanny tax"). But the income IS taxable to your parent(s), particularly if you plan to claim the child and dependent care credit.  You must use their SSNs and address when asked about your parent/caregiver.

A Schedule H is not required for your parent/grandparent so do not check the box for household employee.

Since it was done in your home your parent should follow the steps below to claim the income which eliminates the self employment tax and if combined with other income the total is above the standard deduction:

1. Click on Wages and Income 
2. Scroll down to Less Common Income 
3. On Miscellaneous Income, 1099-A, 1099-C click the start button
4. On the next screen click the start button on Other Income not already reported on Form W-2 or Form 1099
5. Answer Yes on the next screen and enter the amount under Household Employee Wages. Enter the full amount received
6. Continue until this section is finished.

 Standard deductions for your convenience:

For single taxpayers and married individuals filing separately, the standard deduction is $14,600 in 2024.

For married couples filing jointly or a Qualified Surviving Spouse, the standard deduction  is $29,200, and  

For head of household, the standard deduction is $21,900

  

If you're at least 65 years old or blind, you can claim an additional deduction in 2024 of:

• $1,950 for single or Head of Household
• $1,550 for married or Qualified Surviving Spouse.
• If you're both 65 and blind, the additional deduction amount is doubled. 

For more information, see What's my standard deduction for 2024? 

@dc422

[dc422]

Thanks for the detailed response, but I thought that my parents don't fall under the exception for nanny tax because they are taking care of my child who's under 18 (he’s actually only 1) and that I am divorced and haven't remarried. In this case, can my parents still report the income as other income like you suggested or do they need to do something differently?

[ThomasM125]

Per this excerpt from Publication 926, Household Employee's Tax Guide, since your child is under the age of 18 and you are divorced and not remarried, you should treat as wages and pay payroll taxes on the monies paid to your parents for the care of your child who is under the age of 18 if the annual amount is over $2,800:

Thus, you should issue them a W-2 form to report the wages and file schedule H with your personal tax return.