[FARSUXCPA]

If grandmother is paid > $400 for babysitting granddaughter, is she subject to SE tax.

DONE!

[mike01]

If she nets more then 400 she would be subject to SE tax.

[tax_vixen]

Is she subject to it? Probably not. That income probably would not be reported on Schedule C but would instead be reported on Page 1 as “Other Income” from an activity not engaged in for profit (i.e. a hobby). Similar to not paying SE tax on gambling earnings.

Ok maybe she's doing this with a profit motive, will she owe any SE tax with exactly $400 of income? Probably not. If you look at the forms it asks for “net income from Schedule C” then to multiply that “by 92.35% (.9235). If less than $400, do not file this schedule; you do not owe self-employment tax”.

AUD - 92 :: REG - 99 :: FAR - 92 :: BEC - 82

[StudyInRI]

I agree with tax_vixen. There is really no profit motive, and is probably a hobby and not subjected to SE tax. The reality is, most “babysitter” money doesn't go reported unless a 1099 is issued.

Also, if it's not reported, it's not going to be used for Child and Dependent Care Expenses either.

REG - 97
BEC - 82
FAR - 86
AUD - 96 ... DONE!

[mike01]

Profit motive or not if a taxpayer nets over 400 it is subject to SE tax. If you earn a profit it would be considered a business. Hobby loss rules are to limit the amount of losses you are able to deduct, hobby deductions would be deducted on Sced A. If you made a profit it is not a hobby.

[tax_vixen]

mike01, if my mind recalls it correctly (I'd have to check my materials tomorrow at work), Revenue Ruling 55-258 would disagree with you. The IRS website confirms as well https://www.irs.gov/businesses/small/article/0,,id=208400,00.html

“Rev. Rul. 55-258 – holds that income received in an activity not engaged in for profit must be included in taxable income but is not subject to self-employment tax.”

AUD - 92 :: REG - 99 :: FAR - 92 :: BEC - 82

[tax_vixen]

Also, just because you make a profit does not mean that it isn't a hobby. The determination of whether an activity is for profit and reported on Schedule C or a hobby and reported as Other Income is made by the facts and circumstances.

The IRS lays out the following helpful guidelines in determining the facts and circumstances for a specific situation:

The following factors, although not all inclusive, may help you to determine whether your activity is an activity engaged in for profit or a hobby:

Does the time and effort put into the activity indicate an intention to make a profit?

Do you depend on income from the activity?

If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?

Have you changed methods of operation to improve profitability?

Do you have the knowledge needed to carry on the activity as a successful business?

Have you made a profit in similar activities in the past?

Does the activity make a profit in some years?

Do you expect to make a profit in the future from the appreciation of assets used in the activity?

AUD - 92 :: REG - 99 :: FAR - 92 :: BEC - 82

[mike01]

So if I have a hobby that nets 10,000 dollars profit it is not subject to SE tax because I didn't intend to make a profit. Well you can try that if you want. The hobby loss rules are designed to limit the deductions to the amount of income earned and to prevent you from writing down income from other sources. Hobbies don't generally turn a profit, if it does you can bet it will be classified as a business so the IRS can collect the SE tax

[tax_vixen]

Crazier things have happened. Income from an S Corporation that nets $10,000 of income is not subject to SE tax either. The rules are set up as they are, one choice benefits one way, another choice benefits another way. With a hobby you don't get losses but you don't have to pay SE tax, with a trade/business you get losses but you then have to pay SE tax. (obviously no tax if a loss or zero income, you get my point, trade offs)

Also, you would have a really hard time convincing me that old granny making $400 from babysitting her grandkids is in it for the profit.

AUD - 92 :: REG - 99 :: FAR - 92 :: BEC - 82

[mike01]

I believe you might have a harder time convincing the IRS babysitting is a hobby. Now I understand grandma loves her grandchildren and loves to see them but the point is the hobby loss rules are to limit the amount of losses that can deducted. I have never heard of anyone who actually made a profit try to classify it as a hobby, I have only seen people try to turn hobby losses into business losses so they reduce other income. And I believe that income from a S corp just gets carried to the individual tax return where the SE tax is paid. I could be wrong though.

[mike01]

In the above post I just meant to say the employee pays the regular income tax not SE tax.

[zooyuka]

Have her watch your kid for free and give her a $400 gift.

BEC 71,77
REG 65,85
FAR 7/1/13
AUD 8/24/13

[FARSUXCPA]

I also recall reading somewhere that the tax courts ruled that babysitting by grandparents is not business activity but just wanted to confirm with everybody and hear everyone's thoughts on the tax implications. Thanks.

DONE!

[Author]

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