She babysits my son in her home and I paid less than $3,000. It is treated as more of a grandparent-type relationship (i.e. flexible hours, sometimes overnight, and weekends). Would it be better for me claim it as a gift rather than child care? If I claim it as childcare does she claim it as 'other income' on her joint return with my dad or self-employment income?
The money you paid her depends on the intention behind it. If it were not your relative, payments for child care generally be considered self-employment income. However, if out of the kindness of her heart she sat with them, and out of the generosity of yours, you gave her a gift, then that is what it is.
If it is a gift, you can't claim the credit.
But, if you claim the dependent care (day care) credit, she must report it as Self Employment, not "other income". It will be subject to self employment (social security and medicare) tax, as well as income tax
What happens if the grandparent was paid $5K from an FSA? Would that be treated as a gift on the grandparent's taxes or would that be considered misc. income / hobby income since she is not doing it to make a profit?
A gift is not reported on anyone's tax return. You did not give her a 'gift' if you paid her with your FSA funds.
If you report her name and SSN as your child care provider, she should report the income on her tax return.
She can report it as 'Miscellaneous Income' (not her regular job, not to make a profit) and it won't be taxed as 'self employment income' but it will still be considered taxable income. If she reports it as 'hobby income' it's still taxable income also.
However, if her total income is below Filing Requirements, she is not required to file a return to report it.
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