How to report payments to grandparents for babysitting our kids and they accrue social security credit

[mbj_9019]

My parents are babysitting our kids this year and we will be paying them annually ~12K. My parents live with us and they are  73 years old.  I see that nanny tax doesn't apply to parents, but they  would like to report this income and  pay FICA tax to accrue SS credits for them because they don't have 40 credits yet(recent immigrants).

1) What is the best way for  me to report this payment in my tax return and how should my parents report it in their return to acrues SS credits?

2) Can I claim dependent care credit for the money paid to my parents for child care?

[AmyC]

You can claim dependent care credit for the money paid. The best way to report your parents income will be up to you. If they are not already household employees, you are rather stuck with claiming them as contractors and that could be disallowed later. You are in a danger zone since they live with you and the IRS does not require Medicare and Social Security be withheld when the parents live with you. 

They are acting as household employees rather than contractors. As contractors, they would have more children they care for.

FUTA - unemployment tax must be paid on employees. For Social Security , see Household Workers - Social Security

References:

• Do I have to pay taxes on what I pay to my Household Employee?
• Who is considered a household employee? 
• 2021 Schedule H (Form 1040) - Internal Revenue Service. 
• 2021 Instructions for Schedule H - IRS 

[mbj_9019]

Thank you for your response.

I don't want to be in danger zone. So, since my parents live with me they should be considered as household employees. I cannot withhold FICA tax for them as they are my parents. Did I undestand it correctly?

But, can they report it as self employed income and pay FICA tax themselves? I'm ok with not claiming dependednt care credit if that is the right way for them to get SS credit. 

[AliciaP1]

If the only children they care for are their own grandchildren, then no, they should not be considered contractors or self-employed and should not pay FICA taxes.  

The only way you can report the payments you make to them and pay the FICA taxes is if your child(ren) had a physical or mental condition that required the personal care of an adult for at least 4 continuous weeks during the calendar quarter in which services were performed and you were divorced and not remarried, a widow or widower, or married to and living with a person whose physical or mental condition prevented him or her from caring for the child for at least 4 continuous weeks during the calendar quarter in which services were performed.

@mbj_9019

[mbj_9019]

Thank you! This helps

[Opus 17]

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@mbj_9019 wrote:

Thank you for your response.

I don't want to be in danger zone. So, since my parents live with me they should be considered as household employees. I cannot withhold FICA tax for them as they are my parents. Did I undestand it correctly?

But, can they report it as self employed income and pay FICA tax themselves? I'm ok with not claiming dependednt care credit if that is the right way for them to get SS credit. 

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If they are household employees and you don't pay nanny tax, they don't get social security credits.

If they reported self-employment income on schedule C, they would get social security credit, but it would be very difficult to sustain at audit.  They don't seem to meet the tests for independent contractor.

https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-o...

[mbj_9019]

Thanks. I jusy want to confirm  my understanding of nanny tax.  I cannot pay nanny tax since they are my parents. Am I correct?

[Opus 17]

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@mbj_9019 wrote:

Thanks. I jusy want to confirm  my understanding of nanny tax.  I cannot pay nanny tax since they are my parents. Am I correct?

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I think you want to voluntarily pay household employee tax even though it is not required, to create a credit for your parents.  That's getting to be close to a legal question I shouldn't answer, except to point out the language in the IRS documentation.

https://www.irs.gov/publications/p926

Wages not counted.

Don't count wages you pay to any of the following individuals as social security or Medicare wages, even if these wages are $2,400 or more during the year.

1. Your spouse.

2. Your child who is under the age of 21.

3. Your parent. Exception: Count these wages if both the following conditions apply.

   1. Your parent cares for your child (including an adopted child or stepchild) who is either of the following.

      1. Under the age of 18.

      2. 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.

   2. Your marital status is one of the following.

      1. You’re divorced and haven't remarried.

      2. You’re a widow or widower.

      3. 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.

4. An employee who is under the age of 18 at any time during the year. Exception: Count these wages if providing household services is the employee's principal occupation. If the employee is a student, providing household services isn't considered to be his or her principal occupation.