Paying Parents to Care For My Child

[xzhang0828]

Situation: My parents retired in their home country and is now reunited with me here in the U.S.  Now pending their legal status adjustment.  My wife and my work schedule leaves huge gaps for child care during the weekdays so who better to get childcare from but Grandma and Grandpa.  We are paying them to care for our child and would like to know the steps to file taxes for them as well as claiming child care credit when we file our own taxes.

Topics:

1. What form will we need to prove this childcare payment is taking place?
2. What form will we need to issue them?
3. What for will they be using to file taxes?
4. They live with us and thus would they be Household Employees?  What documents will they need to file their 2023 taxes when the time comes?

[Anonymous_]

@Critter-3 

[Opus 17]

If your parents live in your home, and you provide more than half their financial support, and their taxable income is less than $4400 (each), then they qualify to be claimed as your dependents and you can’t claim the dependent care tax credit for paying them to watch your kids, even if you don’t actually claim them as dependents.  

If they work for you in your home, they are your household employees.  You are not required to withhold or pay household employees tax because they are your parents, but if you pay more than $2200, you must issue them a W-2.  Again, this is per person, you can’t pay “your parents” as a combined unit.  You could pay mom only, or dad only, or both individually, depending on what they do for you.  

Incidentally, are they legal to work in the US?  The IRS just wants their tax money and doesn’t care about legal status, but if they don’t have SSNs it will be much harder to issue the correct forms.  

By combining the above answers, you will see that you can technically make your parents not your dependents (to claim the day care credit) if you pay more than $4450 to at least one of them and they file a joint return.  

Since you must issue a W-2 for their wages, they will file a form 1040 tax return.  They won’t owe income tax unless their total income is more than about $25,000, but if they live in the US, they must report all their world-wide income including foreign investments or pensions.  

However, you must also be aware that by making them household employees, you may fall under state employment laws regarding hours worked, minimum wages, benefits, unemployment insurance, and other labor law issues. There may be exceptions for family members, but you need to determine that for yourself.

[Critter-3]

Paying Grandma for Childcare

It can be hard to view your mother as either an employee or an independent contractor, but for purposes of the IRS, she falls into one category or the other if she is being paid to babysit your children. Because your mother is your parent, grandma has no nanny tax that would make her responsible for paying both Social Security and Medicare taxes of 15.3 percent on her babysitting earnings. However, this income is still subject to taxation, depending upon how much money she earned during the year in total. For IRS income minimum filing thresholds, refer to IRS Publication 17, Your Federal Income Tax For Individuals.

If your mother babysits at her home, then she is considered an independent contractor, and you should issue her an IRS FORM-NEC   at the end of the year totaling the amount she has received for babysitting. The IRS requires payers to submit 1099-MISC when they pay an independent contractor more than $600 in a calendar year. In turn, she is responsible for reporting this income to the IRS if it exceeds $400 per year. She is, however, able to deduct certain expenses associated with babysitting, such as snacks or meals provided to the children. See IRS Publication 587, Business Use of Your Home (Including Use by Daycare Providers), for more information regarding possible daycare-related deductions.

When your mother babysits at your home, she is technically a household employee, however, you will not have to withhold FICA (Social Security and Medicare) taxes on this income, and she will not have to pay FICA taxes because she is your parent. But, she will still possibly have to report this income if she is required to file taxes for the year. You do not have to issue her a W-2 at the end of the year if you decide not to withhold FICA taxes, but it is a good idea to officially have her on the payroll. Then, she is required to report this income – and pay FICA as well as income taxes – if you claim the Child and Dependent Care Credit.

How Do I Report the Money I Pay My Mom for Babysitting on My Taxes?

If you plan on claiming the Child and Dependent Care Credit, then you must supply the Social Security information of your child care provider to the IRS. Because you are claiming this credit, you are no longer exempt from the nanny tax, and your mother will be responsible for reporting her income as well as paying her portion of FICA taxes.  If you qualify for the credit, you need to complete IRS Form 2441, Child and Dependent Care Expenses, and Form 1040 or Form 1040A, U.S. Individual Income Tax Return.