[Lentilcounter]

A friend of mine is hiring his sister-in-law to be his nanny. He wants to know if he should be withholding payroll taxes. He says that the only instruction he would be providing the sister-in-law would be the baby’s nap times. He would also drop off the kid at the sister-in-law’s house. However, I am thinking that she is considered a household employee because he can control the way that she takes care of his kid (even if he isn’t giving a whole lot of instruction presently). Furthermore, he is providing the tools such as diapers to take care of the kid. The sister-in-law is over the age of 18 and wages paid will exceed $2K over the course of the year.

What do you think?

BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?

[aaronmo]

The rules are household employee 🙁

If you're asking what most people would actually do…

[turo9992000]

Is the sister in law a household employee if the babysitting will be at the sister in law's house?

[Bourne]

Reporting the payment to a sister in law for $2k/year. Props to your loyalty!

[Lentilcounter]

@turo9992000

“Is the sister in law a household employee if the babysitting will be at the sister in law's house?” <—This is my friend's argument for 1099 treatment.

BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?

[Troys22]

Interesting question. I feel like you report the wages to the sister in law through 1099 and take the dependent care deduction. Its no different than me taking my children to private babysitter and paying them and then them providing me with statement with amount paid over the course of the year. I think a valid argument could be made that she is not a household employee as she is not working at your personal residence.

[aaronmo]

I didn't see the part about it not being in the home…

Agree with the others.

[Troys22]

Fourth sentence. “He would also drop off the kid at the sister in laws house”

[turo9992000]

Your friend does not have to provide a 1099 either. Just report the amount paid on form 2441. He doesn't need to report a 1099 since the expense is not a business expense. Was he paying for the babysitter because he had to work or was looking for work. If not, then he shouldn't report anything. It's up to the babysitter to report it.

[Lentilcounter]

He's paying for the babysitter because he has to work.

BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?

[Troys22]

Agree with turo.. no 1099 necessary.. but it does sound like the expenses would qualify for the dependent care deduction. Assuming the babysitter is going to report the wages and self employment wages, I would recommend your friend at least getting a statement from the babysitter showing the amount paid. Although the deduction is often minimal because of threshold limitations, no reason not to take it.

[Sir Plus]

Turo's answer is correct and best answer.

However to add to that, although it is not reported as a business expense on Sch. C or Sch. A, it's still reported as a credit on the tax return Form 2441 for the family paying for nanny services, which is one better than a deduction. The form will ask for all the nanny's info (address, SSN, and most importantly AMOUNT of $$$ rec'd, etc.). So, once you report this amount on your return as a credit, the government will expect to match this to income reported on the nanny's return under self-employment income or other income Ln 21. Think of the 2441 as a replacement for the 1099, it's essentially reporting the income on the TR without filing a 1099-MISC.

If they don't see the income reported on the nanny's tax return after you've reported the credit, it will raise a red flag. In reality though, IRS have bigger fish to fry and don't have the resources or time to chase after every nanny evading taxes on $2k of income.

This matching principle is similarly treated like when a spouse reports alimony paid as a deduction before AGI (on husband's TR), IRS will look to the spouse's return (wife who is receiving the alimony income) and make sure she is reporting the alimony received as taxable income.

In reality if you pay a family friend or neighbor cash to watch your kids, you don't take the credit on your tax return, because then the family friend/neighbor will have to report. Just count your losses and move on.

[Lentilcounter]

Thanks guys. I also reached out to a CPA with Intuit and got the same response.

“No, she is not a household employee. She is self-employed as a caregiver/babysitter/nanny, etc., doing business as a sole proprietor. You do not need to issue a W-2 or a 1099-MISC Compensation form to her.

She has to give you her Social Security Number or Employer Identification Number (if she has one) and the dollar amount you paid her, so you can complete Form 2441, Child and Dependent Care Expenses – IRS.gov, on your personal income tax return. ”

BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?

[Author]

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