I am looking to hire my mother to be a household employee to care for my children. Do I need to have my mother complete a W-4 even though she should be exempt from FICA?

[bigo121]

To clarify, I am asking this question because I am trying to determine if it is best to get a payroll service to pay her and keep up with records for taxes and the Dependent Care FSA reimbursements.

I'm married with children under 13 and my mother will be working from my home. We will be paying over the 2600 threshold, however from what I am reading on the IRS publications 503, 926 and 15 (Circular E) I shouldn't pay or withhold FICA for her wages or pay FUTA. 
What I'm unsure of is should I use a payroll service to pay her and if so do I need to have a w-4 for her? 
I am going to use the Dependent Care FSA reimbursements from my employer as well. I figured a payroll service would help us to maintain records better but it appears many of them don't understand or account for the parent exception. I could also be misunderstanding or over complicating this. I have an EIN setup already and registered for state unemployment taxes to hire her. Should I just write her checks and issue a W-2, and if so is this sufficient for IRS reporting? I want to claim my FSA benefits and keep things as simple as possible tax wise for my mother and me.

[ShirlynW]

According to the IRS Pub. 926, the household employer rules for federal income tax withholding have not changed. That is, they are not required to withhold federal income tax from wages paid to a household employee. They should withhold federal income tax only if the household employee asks to withhold it and the employer agrees. Employers will figure withholding based on the information from the employee's most recently submitted Form W-4, Employee’s Withholding Certificate.

Any employer that pays any single employee at least $2,400 in the 2022 tax year, or cash wages to all household employees totaling $1,000 or more during any three-month calendar quarter during either the current or previous tax year, the employer must pay Federal employment taxes.

For more information, pages 4 and 5.

[Hal_Al · Accepted solution]

You don't need to do anything, because of the grandparent exception.  You will tell the IRS how much you paid her (and provide her SS#) when you fill out form 2441 (part III) to claim the Dependent Care FSA.

She will report the income on her form 1040. She does not need a W-2 (although you can provide her one if you want to).

Without a W-2, In TurboTax, she enters at:

 Federal Taxes

Click on Wages and Income

Scroll down to Less Common Income

On Miscellaneous Income, 1099-A, 1099-C click the start button

On the next screen click the start button on Other Income not already reported on Form W-2 or Form 1099

Answer Yes on the next screen and enter the amount under Household Employee Wages

TurboTax will put the income on line 1 of form 1040  with the notation "HSH", on the dotted line. It is still considered earned income for the earned income credit and/or an IRA contribution.

She may not be able to use the free edition of TT, when entering this way.

[bigo121]

Thank you so much for your response @ShirlynW @ I read the information from pub 926 that you posted, but my question is in regards to "Table 1. Do You Need To Pay Employment Taxes?" on page 5 as well as Page 6 "wages not counted." Table 1 shows the following

If you...

 Pay cash wages of $2,600 or more in 2023 to any one household employee.

Don't count wages you pay to:

Your spouse,

Your child under the age of 21, Your parent (see Wages not counted, later, for an exception), or

Any employee under the age of 18 at any time in 2023 (see Wages not counted, later, for an exception).

Pay cash wages of $2,600 or more in 2023 to any one household employee.

Page 6 shows

Wages not counted. Don't count wages you pay to any of the following individuals as FUTA wages. Your spouse.

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

If I understand correctly, doesn't this mean my mother and I would be exempt from FICA/employment taxes? She would have to still pay income taxes but from what the IRS shows that should be all, right?

I also see similar verbiage in publication 15 (Circular E) Employer's Tax Guide to support the exception for parents on page 13 under "parents employed by their child."

 When the employer is a child employing their parent, the following rules apply. Payments for the services of a parent in their child's (the employer's) trade or business are subject to in- come tax withholding and social security and Medi- care taxes.

Payments for the services of a parent not in their child's (the employer's) trade or business are gener- ally not subject to social security and Medicare taxes.

I just want to make sure because I don't want to get myself or my mother in any tax trouble. I also don't want to pay more for payroll services and taxes than what's required. 

Thanks for any additional insight you may be able to provide 🙂

[bigo121]

Thanks for replying @Hal_Al @. I read a previous reply from you on another post so I was pretty confident in this answer but I wanted to double check for my particular situation regarding the use of a payroll service which requires a W-4. For the DCRA reimbursement, since I won't have a traditional provider receipt, can I make one from the online templates for nannies and complete form 2441 with my mother's info when I file taxes? Thanks again for any insight you can provide 🙂

[Hal_Al]

Q. For the DCRA reimbursement, since I won't have a traditional provider receipt, can I make one from the online templates for nannies?

A.  That's more of a question for the DCRS administrator than a tax question.

Q. Can I make a receipt from the online templates for nannies to complete form 2441?

A.  You complete form 2441 from your own records.  You don't provide any receipts to the IRS at the time you file your taxes. That comes later, in case of an "audit". I'm of the opinion, a cancelled check is all you need, particularly if you parent has a corresponding deposit. 

[bigo121]

Thank you so much! I found out the DCRA info and thank you for the information. I greatly appreciate the help. 

[swkwan006]

I am currently working on our 2022 income taxes through Turbo Tax Online. I have a similar situation where I have paid my mother-in-law (grandparent) in 2022 to watch our child during the summer and winter breaks at our home. We paid her over $2400, and I filed a claim to get reimbursed for this through DCFSA. I reported this in Turbo Tax through the "Deductions & Credits" >> "Dependent Care Credit" section. My question is for the "Other Tax Situations" >> "Nanny and Household Employee Tax" section. There is a question about whether or not I need to report household employment taxes paid by me or jointly with my spouse. Do I simply answer "No" since my mother-in-law is exempt from FICA? If I answer "Yes", it asks me for an EIN number and amount subject to FICA taxes.

[DawnC]

You can answer No to that question and you don't need to complete the Nanny Tax (Schedule H) section in TurboTax (unless there is an exception, see below).   You or your spouse's parent is exempt from the FICA requirements.  Your MIL reports the income on her federal tax return.    

Don't withhold or pay Social Security and Medicare taxes from wages you pay to:

1. Your spouse,
2. Your child who is under age 21,
3. Your parent, unless an exception is met, or
4. An employee who is under age 18 at any time during the year, unless performing household work is the employee's principal occupation. If the employee is a student, providing household work isn't considered to be his or her principal occupation.

See Publication 926 for more information on these exceptions. (page 6)  @swkwan006