Should my mother be an Independent Contractor or my Employee (for tax purposes) as she provides babysitting services to my young children?

Question

My 65-year old mother lives with us in Florida, and she takes care of our two young children while my husband and I are at work. My husband and I pay my mother about $6,000 a year in cash, and we use my mother's SSN as our Child Care Provider on Tax Form 2441 (Child & Dependent Care Expenses). Consequently, my mother files her own taxes as a "Self-Employed Caregiver", and she declares the $6,000-income she receives from us. And, she pays her own taxes yearly. Are we doing it correctly? Or, should we be paying my mother's Nanny taxes instead (as if she was a Household Employee)?
One more thing: A tax preparer told us in the past that my mother must have a different address in order for us to be able to claim what we pay her under Form 2441. Is that true, or can my mother use our same address?

Roger Pearce · Answer

The question needs to be put in the context of both your tax situations. You are allowed to financially support your parent living in your home. And you can then claim an exemption for her as a dependant based on the fact that she is your mother and you pay more than half her upkeep. To calculate this, consider the value of food and housing you supply and add to that what you pay her for watching the kids as part of your support. Now divide that by her living expenses. Are you providing more than 50%? Then she can be claimed as your your dependant. Now look at her tax situation. What does she lose by not taking her own exemption compared to what you gain by taking her exemption. If you benefit more than she loses, then you can pay her what she loses and you still come out ahead. This is very common within families.

Answered by Roger Pearce on January 18, 2021

JTP - Apologise to Monica · Answer

You should option to treat her under the terms of the "Nanny Tax." Household employee.

To be clear - The tax code allows (as Joe commented) for you to reimburse her expenses while watching your kids, effectively getting you the Spending Account deduction and avoiding her needing to pay tax on the income.

That's not your goal. You want her to qualify for Medicare. If she claimed Independent Contractor, she'd have to pay her own Social Security and Medicare taxes. Your situation is a legitimate Nanny Tax (household employee) one. A bit of paperwork for you, both at state and federal level, although, in Florida you have no state tax, so that's out of my element.

Should my mother be an Independent Contractor or my Employee (for tax purposes) as she provides babysitting services to my young children?

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