Daycare Tax Tips


Mother wants to claim the dependent care credit

What is the tax impact on the babysitter?

A soon-to-be-babysitter writes:

> My sister-in-law, who is becoming a mom, has asked me to provide child care for her at her home! However, she wants to be able to write off the child care in her taxes. We made an agreement of monthly pay, but are not quite sure on how to avoid any problems with taxes! How do I make her write off possible without hurting myself in my taxes?

There really is no way for your sister-in-law to claim the Credit for Child and Dependent Care Expenses unless you report the income on your income tax return. This is because your name, address, social security number, and the amount she paid you will appear on Form 2441.

The correct thing in this situation (with you caring for the kids in her home) is for her to treat you as a household employee and give you a W-2 at the end of the year. Then you report the income as wages on your income tax return and she can claim the credit on hers.

If she doesn't treat you as an employee, you could report the income as self-employment earnings on your tax return. (Or you could report it as wages using IRS Form 8919, but that would get your sister-in-law in trouble over the employment taxes she didn't pay.) If you agree to treat the income as self-employment income, I suggest that you ask your sister-in-law to increase your pay to help with the taxes. Self-employed persons pay about 14% of their earnings for social security and Medicare taxes (in addition to paying income tax). Employees pay only 7.65% and the employer pays the rest.

You are right to be asking about the tax impact of this situation. For your part, just remember that whatever babysitting income you receive is taxable income to you (one way or the other) and you must report it on your tax return. You cannot get in trouble if your sister-in-law ignores employment tax rules, but she can. She should refer to Publication 926, the IRS Household Employer's Tax Guide.

Posted on 2010-08-24 00:04:04

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