My child's grandmother is going to provide day care in my home. I know she needs pay statements, but do I also need to produce a W2 for her? Any withholdings?

[makessense999]

I have spent days/countless hours attempting to get a real answer to how grandparents report income earned by providing childcare for grandchildren.  Finally figured it out.  It is pretty simple.   Grandparents providing childcare for grandchildren in either the grandparents home or the child's home, are exempt from any payroll taxes.   The IRS does not allow payment of social security/medicaid taxes on income paid to grandparents for providing domestic service. There are exceptions for divorced/widowed parents of the child who are allowed to pay social security taxes for the grandparent.   

The parent of the child can claim the daycare tax credit but must provide the name and social security number of grandparent providing childcare on the child tax credit form. 

The grandparent reports the exact amount earned (as reported by the child's parent on the daycare tax credit) on Schedule 1, line 8 with the description childcare for grandchildren.   The schedule 1 provides the documentation so a 1099 MISC is not necessary.  The important thing is that the parents daycare expense reported must be the same as the income reported by the grandparent.

The income reported on Schedule 1 is then reported on 1040 line 8.  

When using an on-line/efile service the grandparent will need to scroll through to Misc Income (not 1099 misc) and then scroll down to Other Income-fill in the amount and the description box.  The on-line service will generate a Schedule 1 to go along with the 1040.

[Bonoz09]

I paid my mother to babysit in my home in 2021. I understand she is exempt from FICA tax and i think i understand how to show this income on her return. However other than adding her as a Daycare provider on my return , do i still need to check the "Did you have a household employee ? " box n Turbo Tax on MY return ?  Since she's exempt and i dint have to pay those taxes for her as an employee , should i still be checking this box? I have it checked currently and there was no other follow up questions regarding this. I would think they would have still asked questions on this employee in order to know what i paid out and to who and for what ?  I want to ensure the paper trail between hers and my return is as clear as possible. I plan on taking the Child Care tax credit based on this payment.  Thanks

@nannytax

[DianeW777]

A parent is not considered an employee for social security, medicare or FUTA (federal unemployment) taxes.  Because employment taxes are not required for your parent, then a Schedule H is not required. Do not check the box for a household employee. 

Your mother must report the income on her tax return.  You can issue her a Form 1099-NEC for her services, but either way she will pay her own social security and medicare tax as well as any potential personal income tax.  The fact that you are not required to pay employer taxes for her or withhold any income tax for her does not negate her responsibility to pay the required tax on income she earned from her services.

She will report the income as self-employment.  You will take the credit for child and dependent care for the same amount as long as it doesn't exceed the maximum credit allowed based on number of children.

• IRS Publication 15

Parent employed by son or daughter. 

When the employer is a son or daughter employing his or her parent, the following rules apply.

• Payments for the services of a parent in the son’s or daughter’s (the employer’s) trade or business are subject to income tax withholding and social security and Medicare taxes.

• Payments for the services of a parent not in the son’s or daughter’s (the employer’s) trade or business are generally not subject to social security and Medicare taxes.

Social security and Medicare taxes do apply to payments made to a parent for domestic services if all of the following apply.

• The parent is employed by his or her son or daughter.

• The son or daughter (the employer) has a child or stepchild (including an adopted child) living in the home.

• The son or daughter (the employer) is a widow or widower, divorced and not remarried, or living with a spouse who, because of a mental or physical condition, can't care for the child or stepchild for at least 4 continuous weeks in the calendar quarter in which the service is performed.

• The child or stepchild is either under age 18 or, due to a mental or physical condition, requires the personal care of an adult for at least 4 continuous weeks in the calendar quarter in which the service is performed.

Payments made to a parent employed by his or her child aren't subject to FUTA tax, regardless of the type of services provided.

• Do I need to file Schedule H? (see the information in the last bullet)

@Bonoz09

[JPSUN]

I know this is an older thread but I was looking for info about this as well. When claiming the child care credit on my own taxes would I select that grandma is a household employee? 

Is it too late now to issue her a 1099 misc? Neither of us has filed out taxes yet. She has no other income aside from her social security which is little to nothing. We paid her $10,000 for the year for child care help in our home. 

[Hal_Al]

@JPSUN When claiming the dependent care credit, you do not designate the tax status of the provider (whether household employee or self employed person). You just provide their SS#.  

The grandparent makes that designation on their tax return.  Since she sat, in your home, household employee is the correct designation.  It would not be appropriate for you to issue her a 1099-MISC or 1099-NEC.

See my Jan 14, 2020 post, on page 1 of this thread, for how to do that. 

[JPSUN]

@Hal_Al 

On turbo tax where I input the information for the provider there is a box to check that says "check here if this care provider is your household employee" That is what I am referring to. 

[Hal_Al]

Answer no (don't check that box), since you are not filing Schedule H ("nanny tax"), with your tax return. 

[JPSUN]

@Hal_Al 

"In TurboTax, enter 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 continue the interview until it completes.

TurboTax puts the amount on line 1 (wages) of form 1040 (line 7 prior to 2018) with the notation “HSH”. It is considered earned income."

When we go to do this in turbo tax (for grandma) it says "Only report income in the box below that is less than $2,300 per employer. if you made $2,300 or more then you must contact the employer to have them issue you a W-2". We paid her $10,000

[Hal_Al]

Ignore the $2300 limit.  Not applicable since it's the grandparent.  TT will process the $10,000.

[JPSUN]

@Hal_Al 

Oh fantastic!! Is there a note or explanation somewhere else? Thank you so very much for your help.

[Hal_Al]

Not that I'm aware of.  But, it's common enough enough situation that it's unlikely to raise a red flag.

[efender]

Hi!  I am so confused on where to put the income that I have made from watching my grandchildren.  My daughter is married and I watch the children in her home.  

Literally on this same thread we are being counseled to do two separate things.

One user is saying that parents can't be household employees and that I have to file as self emploment.

You are stating that they are household employees.

Which is correct?  Why is there so much misinformation?  Why is the other user saying that they can't be household employees?

[DianeW777]

It is not self employment in your situation. 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. Since it was done in your daughter's home, then they should follow the procedures provided below.

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 they are claiming as a child care deduction even though the screen says enter only if less than $2,300 (being the taxpayer's parent waives the $2,300 limit).
6. TurboTax will put the income on line 1 of form 1040 with the notation "HSH". This income is earned income and would qualify for the Earned Income Credit (if you're under 65) and for making an IRA contribution.
7. See the image below.

Wages not counted.  (IRS Publication 926)

[onevoice247]

Is all of the above information still applicable for the 2023 tax year? I'm entering this situation as a grandparent, living in the home, to be paid for childcare.  After 30 years of paying the self-employment tax, I was hoping this situation might be different, without my daughter incurring hardship on her end. 

Edit to add:  Daughter already pays for preschool. My care is after school and on sick days and days off/summer. I'm assuming she enters the preschool info re: childcare expenses. 

[DavidD66]

Yes, your daughter should be reporting what she pays for preschool to claim the Child and Dependent Care Credit.  

What your daughter pays you (her parent) does not count as social security and Medicare wages unless, both of the following conditions apply:

1. The child is under the age of 18, or 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 Daughter's marital status is one of the following:
   1. She's divorced and has not remarried.
   2. She's a widow
   3. She's living with a spouse whose physical or mental condition prevents them from caring for child for at least 4 continuous weeks in the calendar quarter services were performed.

If both of the above conditions apply, then you are a household employee and your daughter may need to pay and withhold social security and Medicare taxes, pay FUTA or both.  Or, if you don't otherwise qualify as a household employee and are self-employed, then you are subject to the self-employment tax.

If a household employee is paid less than $2,600 in cash wages in 2023, ($2,400 in 2022) none of the wages you paid to the employee are social security or Medicare wages and neither the employer nor the employee will owe social security or Medicare tax on those wages.

For additional information, see IRS Publication 926 Household Employer's Tax Guide