Nanny taxes: How do I account for QSEHRA reimbursement payments in TurboTax?

[JMTTX]

I employ a household employee (nanny) and provide a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) to help my employee pay for medical expenses. QSEHRA reimbursement payments to my employee are tax deductible for me. How do I account for the QSEHRA reimbursement payments in TurboTax?

[DawnC]

The QSEHRA reimbursements are tax-deductible as a business expense (employee benefits) on a business tax return.  However, households are not considered businesses, so household employers do not file small business tax returns or Schedule Cs.   You report your payroll taxes on Schedule H which gets submitted with your personal tax return, Form 1040.   For more detailed information on Schedule H, please click on this link to view a TurboTax Help article.   Where is Schedule H in TurboTax?

Your QSEHRA reimbursements to your employees are tax-free, meaning as an employer, you won’t need to pay employer tax on the amount and your employees won’t have to pay income tax.

In most cases, the payroll tax and expenses you pay in connection with your household workers’ wages are not deductible on your personal tax return.  The IRS considers these taxes/benefits, and the wages on which they are based, to be personal, nondeductible expenses.  But there are a couple of deductions that you may be able to take advantage of on your personal tax return if your household employee provides childcare or medical care for you, your spouse, or your dependents:

• Dependent Care Credit – If you are qualified to claim the Child or Dependent Care Credit and you pay a household employee who cares for your child, other dependent, or disabled spouse, the payroll taxes you pay on the wages, as well as the wages, are counted as part of your eligible expenses when figuring the credit. 
• Medical Expenses – The wages and associated payroll taxes you pay to a household worker who provides nursing services for you, your spouse, or your dependent are medical expenses that may be deductible on your return if you itemize your deductions. (Note that the same expense can’t be used both as a medical deduction and for the Child or Dependent Care Credit.) 

In these two situations, the payroll taxes that you include are the FUTA (federal unemployment) tax, state unemployment tax, and your portion of the Social Security and Medicare taxes that you have actually paid during your tax year.

Where do I enter my self-employment business expenses (employee wages and benefits)?   If you were actively engaged in a business, you would enter your QSEHRA reimbursements as common business expenses using the instructions in the link above.