Usually you must withhold Social Security and Medicare taxes for household employees. But if you hire your parent to watch your kids, they may be exempt.
I was recently asked, “How do I go about hiring my Mom to be a nanny?” Unlike me, who would just try to pawn my kids off on my Mom whenever I got the chance, this person wanted to make it official: 1. She wanted to pay her mother for the work, and 2. She wanted to make sure all the tax stuff was handled properly. If you’re thinking about hiring your Mom (or your Dad) here’s what you should know.
First, when you hire your parent for domestic work (including child care, housekeeping, etc.) your parent is exempt from social security and medicare withholding. This makes the whole “hiring your parent” thing a lot easier. There is an exception though, and I think a lot of families might fall into this category:
If you meet both of these conditions: 1. Your parent cares for your child who is under 18 or is disabled and 2. You are either divorced or widowed and not remarried, or your spouse is permanently disabled. Note: the rules don’t say anything about if you were never married, just divorced or widowed. So, if you meet these conditions, then you do pay the payroll taxes. Otherwise, just pay your mom every week. She can report the income on her tax return and you can report that you paid her and claim the child care credit. Super easy, right?
If you do have to do the payroll withholding, it’s not that hard. For 2011, you’ll want to withhold 5.65% to cover the employee’s share of payroll taxes. You’ll wind up matching that amount when you file the Schedule H with your tax return (the household employee tax.) You have the option of paying your Mom’s share of the employee tax and not withholding it from her pay. (You just don’t withhold and you pay double the employer’s tax, still pretty easy.)
You do not pay FUTA (federal unemployment taxes) on your parent no matter what the circumstance.
You may be required to pay state unemployment insurance, you’ll have to check with your state. Here in Missouri, you’ll pay unemployment insurance if you pay your parent over $1,000 per quarter.
You will need to provide your parent with a W2 after the year is over showing the income paid, whether you withhold the payroll taxes or not.
For more information of household employees, check out IRS publication 926.
To check out the Schedule H, click on this link: Schedule H.
Addendum: shortly after I posted this blog, I read an article about nanny’s that get paid over $150,000 a year. If you pay your nanny over $106,800, then you don’t need to withhold the social security tax on any amount over that. (You still withhold the medicare.) If you do pay your nanny that amount, I’d just like to point out that not only am I really good with children, but I can also prepare my own payroll and do all the associated tax forms that go with it. (Just saying.)
Hi Lee,
You’ll want to check with the South Carolina Division of Employment Security about whether or not you need to pay unemployment insurance. That varies by state. Here’s a link to their website: https://dew.sc.gov/ I’d look at the contact page and call the office in your city. Talking to a human is easier than wading through the South Carolina tax code. If you are withholding South Carolina state income tax, you’ll need to get a state tax identification number. Here’s a link to their website: https://dor.sc.gov/ You would report your parents withholding on your tax return with a Schedule H. (Instead of issuing 941 forms like other employers.) And you can always hire one of those nanny payroll firms. It costs, but they do a good job of making sure that you’re covered under all of your state and local rules.
Hi Jan,
Thanks for the reply!
Apart from W2 what other forms do I need to issue to my parents?
I believe I also need state forms as I live in South Carolina.
Would I also need to get the state equivalent of the EIN for South Carolina?
For my own tax filing what other forms do I need to file?
Your response is much appreciated.
Regards,
Lee Chong
Hi Lee,
You don’t have to set up a company to hire your parents. You would just be a household employer. You can get an EIN number at the IRS website. Here’s the link: https://sa.www4.irs.gov/modiein/individual/index.jsp When you go to apply, you’ll see a whole list of business types like sole proprietor, LLC, etc. You want to scroll down to the bottom where it says view additional types. Click on that. It will take you to another page. On that other page, it has a huge list of stuff. Household employer is the top category on the right hand side. You’re going to click on that.
Once you click on household employer, it gives you one more chance to elect sole proprietor. But you don’t want that. You want household employer. Click on that and you can finish applying for your EIN. You want the EIN number so that you can issue your parents a W2.
Hi Jan,
My wife and I are planning to employ my parents for household work(Cooking,Gardening,Cleaning etc)
Do I have to set up a company to pay my parents?
If so what would be best kind of company for this purpose?(Sole Proprietorship,S-Corp,C-Corp or LLC)
Regards,
Lee Chong
Hi ae5880,
That’s a really good question! According to IRS Publication 926, if you aren’t required to file a W2, you should supply your employee (grandma) with a receipt for services that includes the dates worked, the wages paid, and a general description of the work performed.
I’m employing grandma as a babysitter. I understand there are no taxable wages to report, so I wouldn’t report anything on a W-2, but I need to give her something that she’s going to report on her tax return in order to reconcile premium tax credit on her healthcare insurance. What is that something?
Hi Nathan,
it depends. It would be taxable income to him, so it just depends upon what other income he has and if his income is high enough for it to be taxed.
Hi Jan, My girlfriend is looking to have her dad watch her son and she would pay him. Would he need to pay taxes?
Hi Reshma,
You’re right, I just edited my answer to Vic to correct that. When you owe no tax, there is no Schedule H. Thank you.
Hi Emily,
You do not have to pay social security for a parent, but I’m pretty sure that they will allow you to. Especially if she needs to claim social security. The other option is to pay her cash and she claim it as self employment income. She’ll just have to remember that the self employment tax (her social security and medicare) is 15.3 percent of what her income is.
Hi Jan,
I’m in the same situation as Vic in Texas and I also live in Texas. You commented to Vic on Jan 15th 2018 and said that he would have to file schedule H with his taxes-although he won’t owe any tax on it. Looking at schedule H and answering question A, B and C: where “C” states (Don’t count cash wages paid in 2016 or 2017 to your spouse, your child under age 21, or your parent.) Do NOT file this form.
Am I understanding the schedule H correctly. If yes, then I would just give grandma a w-2 and not withhold any medicare or social security taxes, yes?
Thanks
Reshma
Hi Ayush,
Good question. I would have several questions for you. 1. is she caring for your children while in the United States? I assume yes. 2. Does she have a visa that allows her to work in the US? That’s trickier, because you don’t want to violate any rules there. If she is allowed to work in the US, then she should have a social security number and all of the other rules in the article will apply.
If she is not “allowed” to work in the US, then you would really be “gifting” her money in exchange for her watching her grandchildren. You would not be able to claim the child care expense as a deduction on your tax return. I think that would be the big difference.
I want to hire my mom as a housekeeper and she needs social security credits. Can I withhold social security and Medicare taxes and report it on a W2? The IRS has something about not counting wages paid to a parent
Hi, what are the rules if the grand parent is not a US citizen?
Hi Vic,
I would issue a W2 – not the 1099. If you issue a 1099, then she will be required to pay self employment tax. So you want to issue her a W2, and you will also need to file a W3 – that’s the reporting form that goes with it. You will not file a Schedule H – because you won’t owe any tax on it. You may need to file state unemployment. You’ll want to check on your state’s website. In Missouri, you would not pay unemployment tax on your parents.
Oh, you will want to get an EIN number for you to use as grandma’s employer. How to Get an EIN Number for Free
I would think the W2 to grandma would be proof of payment, but you could have her issue you a receipt. You might want to ask your HR department what type of proof they’d like.
Hi Jan,
This is excellent information – thank you! I would like to understand what forms I need given the following situation. We have some money left over in our Dependent Care Spending Account from 2017 that I would like to use as reimbursement for money paid to grandmother to watch the kids while both me/wife are at work. We live in TX. The questions are:
1) What form(s) do we need to fill out and give to grandma so she can report her income. A 1099-MISC, or W-2,or something else? They are retired and collecting SS.
2) What “receipt” can I provide to my DCSA company in order to get reimbursed for our payments to grandma?
Thank you!
Hi Sara,
a couple of thoughts – generally, I would say give her a W2 as she wouldn’t be subject to social security and medicare taxes. But – the W2 would also prove her income when she files her taxes and give her the back up she’ll need with Healthcare.gov etc.
But – here’s another side of the coin – I’m guessing that she’s too young for social security. So next question – does she have enough “credits” to receive social security when she retires? Basically, you need 40 credits – or 10 years of work history. Or, she may qualify for widow benefits. So, if your mother will be able to claim social security benefits when she retires, then I think it makes sense for her to get a W2 with no social security withholding. But – if she needs the credits so that she can receive social security later, then you might want to consider having her be self employed and have her do a schedule C and earn enough to pay a full year of Social Security tax. Does that make sense?
A Social Security credit is $1,260 of earnings. So for a full year’s of credits, she would need to earn $5,040.
You’ll have to check with Healthcare.gov about how to prove income. I know it’s proven at tax time because the amounts all get reported, but I don’t know what they ask for up front.
I believe that you will have to pay Texas unemployment taxes.
Hi Jan,
Thank you for the post!
My mother lives with my husband and I and does all the housework. We want to pay my mom for the work she does (this will be her only income) so that she can insure herself through HealthCare.gov and also contribute to her social security and medicare benefits. What is the best tax plan for us? Do we need to give her a W2 or can she file as self-employed and pay the social security and medicare taxes herself when she files? As proof of her income for healthcare.gov, can she show bank statements? We live in texas. Would we have to pay the unemployment tax as well?
Hi Kevin,
First, let’s talk about claiming your parents as dependents. In order to do that, they must make less than the current exemption amount which is $4050 for 2015. They have no income so that’s easy for you. They might have social security – but that’s not taxable income (if they have no other income) so you’re still okay there.
Second, they can’t file a joint tax return. They have no income – so again, you’re okay there. They don’t have to file at all.
Third, they can’t be considered to be a qualifying child of anyone else. I’m guessing that’s a slam dunk for you there since they are your parents. But if they had special needs, there’s a possibility they could qualify as a child – but I’m thinking that’s not your situation at all.
Fourth – there’s the member of household or relationship test – you’ve got that covered too.
Fifth – they have to be a US citizen, US national, US resident alien, or a resident of Canada or Mexico. You’ve got that covered too.
So here’s the hard part – support. In order to claim your parents as dependents, you must provide over half of their support. So let’s say that they get $3,000 a year from social security – then you must pay over $3,000 towards their support. This is where you could have a problem. Your Dad just had heart surgery and it was paid for by Medicaid so you might not be able to claim him as he received that support from Medicaid. Although your mother would probably still qualify as a dependent this year.
I mention all that so that you see the whole support thing before we talk about paying them. You see, if you pay them a wage for caring for the kids – that’s their income. If you pay them a wage then it could take away your deduction because of the income test. Or, if you pay them less than the $4050 – you could still get burned on the support test because now that 4050 isn’t support you gave them, it’s what they provide as their own support.
I know, crazy right? Are you dizzy yet? This is sort of making my head spin too.
Personally, I see no need to “pay” your parents for watching your kids. You are all living together as a family. You can give them money – but it’s not as a job but as the part of the household. You may gift them up to $14,000 a year each without any gift tax return. It’s keeping it all in the family. And, you can claim them as dependents on your tax return. You don’t mess up their Medicaid, and you don’t need to file W2s or anything like that.
You won’t be able to claim what you pay them for the child care credit. So that would be the trade off. Issue a W2 if you want the child care credit, don’t do a W2 if you want to claim a dependent. What works the best for you in your tax bracket? If you’re looking for a sweet spot, you could pay your parents $3,000 each on a W2 – that would leave their income below the $4,050 mark and give you a $6,000 child care expense that you could write off. That’s probably your best bet, assuming that it doesn’t mess up your support. Maybe, since you can’t really claim your father anyway, you only pay him the $6,000. Make sure it doesn’t mess up his Medicaid though. Check with your state about how much you father my earn per month before it affects his medicaid.
My parents are on medicaid. No Income. living with us now. Because of the fact that i am paying for all of their expenses (except for health care which they are getting medicaid), i was thinking of filing my tax returns with them being as my dependent.
They do take care of my kids. Can i pay them sometimes? If so, how much? I do not want them to lose medicaid as this is the most important thing for them right now. Dad just had heart surgery and cannot be without insurance.
Can i claim parents as my dependents? Can i pay them for taking care of my kids?
How does that affect my taxes if they are being paid a little by me? How much i can pay them?
Hi Melanie,
For the HSA – you need to report that money as being paid for daycare, otherwise you will be taxed on it. Any other money that you choose to “gift” to your mother-in-law is perfectly fine. You may gift up to $14,000 a year to a person without having to prepare a gift tax return. So you could “gift” her $14,000 and pay her the rest to cover your HSA amount. Remember, your mother in law will have to pay tax on the money you are deferring from the HSA – so my question to you is: what tax bracket is she in? If she’s in a lower bracket – not really a problem. If she’s not – then what’s the point of the HSA? Just something to think about.
Hi! My mother-in-law watches my daughter. We don’t pay her a flat rate (she insists that she does it for free) BUT we cut her a check of $1k-$3k every few months and say it’s ‘for a trip’ or something. a) do we have to file anything with the IRS at all? b) can we still write this off? We do have a daycare fund (like an HSA) and plan on writing that money I set aside off from what we paid her. Thanks!
Hi Susan,
My opinion is that she’s a W2 employee working in your home, not self-employed. You need to issue her a W2 showing her wages. She pays SC tax for the income because she is working in your home.
Hi Matthew,
Wow, that’s a good question! I didn’t know the answer so I did some checking. According to the Fair Labor Standards Act of 1974, nannies are entitled to being paid at least minimum wage. (I didn’t know that before!)
I think if would only be fair to reimburse her for her travel expenses if she has any, since she is being your nanny, but I didn’t read anything requiring that.
With your tax return, you would normally file a form called a “Schedule H” to pay the payroll taxes. But, since she is the grandmother, unless you are withholding for her federal taxes, there would be no social security or medicare withholding so you most likely would not be required to file that schedule H. You would be able to claim what you paid her as a child care expense (if you qualified for that deduction).
You would provide your MIL a W2, showing the income that she earned, which she would then report on her 1040.
You may want to contact a Florida payroll service. There are ones that specialize in nannies! That way you’ll know you’ve done everything by the book.
Hi Sophia,
When earning wage income for social security purposes, I believe for 2016 the amount is $1260. SS Credits
Hi Lee,
if your mom wants to report the income so that she can claim social security – then you’ll want to pay the social security and medicare withholding even if she doesn’t have to. There are companies out there that will do the payroll for you and they specialize in in home care specialists. Just google nanny payroll and find someone in your area. They’ll do it right and take the headache out of it for you.
Hi Jan,
Thank you for your post! I have some questions. We had our mom as our nanny while I was studying for an exam and want to pay her for it. I know you said we wouldn’t have to pay the ss, Medicare, and futa for her but does she need to be paying them quarterly like self employed? Or can she just pay the owed taxes at the end of the year during her tax return. Our accountant told us to just have her pay it during the tax return as self employed but her accountant said she shouldn’t file as self employed. We’re really confused by it. This is the first year she hasn’t worked as work shut down. Also, we live in SC but she lives in GA. I haven’t checked the guidelines for each states unemployment but half the time she babysat it was at her home in Georgia. Do we need to pay both states or just ours or just hers? Thank you in advance!
Hi Misty,
you can write off paying your mom to babysit for the child care credit, but remember that your mom also needs to report the income as well.
Hey,
I live in Florida and my mother in law is nannying our newborn. We were going to pay her for nannying because she has no other form of income. I have a couple questions.
1) Do we have to pay her minimum wage and compensate for her travel expenses?
2) How will we file our taxes next year? How will she?
Thanks!
Gary,
My situation is the same as yours. I did contact SSA, but they were not helpful. Could you share with us if you find out anything? My mom also lived with us so I am not sure if 1099 is the way to go (same address, cares for your kid in your home). Thanks in advance.
Jan-
in your response to Violet you said that her mom would need to earn $1,300 for each quarter of coverage. I thought the rule is $ 2000 for household employees ($8000 min per year for 4 credits). Is this not correct?
Thanks,
Sophia