grandmother is babysitter

[jin80]

grandmother helps watch my three kids when needed and we live in the same household and she is paid. can i claim child and dependent care expense?  i believe i do not have to pay for the "nanny tax" because she is the grandmother. does she need to report her income and will she be responsible for taxes?  can she claim earned income credit?

[Oldlion]

You can only claim expenses that are paid. Yes, Grandma or any other person could be employed by you in your home. I believe it's much like deducting a  babysitter. It's not going to be much of a deduction unless Grandma is charging  a lot. My daughter pays $300 a week for a day care for her 3 year old daughter. 

[jin80]

sorry..meant to say grandma gets paid

[CatinaT1]

It depends. You have options in this scenario since she is a grandparent of the children.  

If she wants to claim the earned income credit, get credit for Social Security benefits, or have earned income for the purpose of making IRA contributions; or if you want to claim the Dependent Care Credit, report the income in one of two ways: 

1. Report the income you pay her as a contractor (if she watches the kids in her home). You do not need to do anything more than pay her. She will track her income and expenses and report the income as self-employment on Schedule C with her tax return. 
2. She could be classified as a household employee (if she watches the kids in your home). The nanny tax rules do not apply since she is a grandparent. In this case, you would issue her a W2 and file a Schedule H with your tax return. If you choose to classify her as a household employee, this article will be helpful in further explaining the details of Schedule H and Household Employment Tax. 

If you are not claiming the Dependent Care Credit, she could report the income as Miscellaneous Income and would describe the income as babysitting grandchildren and the amount so the IRS will not think she is in the babysitting business.