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, my husband and I live with my parents. My parents own the property and we don’t pay rent. I plan to hire my mother to babysit my daughter. My mother wants to report that income so that she gets social security and medicare when she retires (this will be her only income). I also want to claim child care expenses. As an “employer”, I would like to pay all the required taxes so that my mother can get the benefits in the future. I want to give her an easier time when she files tax return. What do you recommend we do? Who can I contact for legal advice? Please help. Thanks.
Hi Gary,
I honestly have no experience with that. But here’s another option that might be more of a “step away”. Pay her as contract labor. Don’t do any withholding. Have your mom file as a sole proprietor (that’s using the schedule C form attached to her 1040.) Then she’ll pay her own self-employment taxes. I suggest that you pay her enough so that she can pay those taxes as if she were your employee.
It might just be best to talk with someone at social security though. They should be able to give you the real scoop.
Hey, wanted to double check that I’m doing this correctly. I recently had a baby in Mid October, 6weeks later went back to work. My mother offered to watch my baby, we planned and agreed on paying her 100/week. Do I put her down as a child care credit? For the year it would be about 400 (due to the end of the year..) she watches him in her home.
Thank you for the response, Jan.
Since this is not a common occurrence, is there a chance that she could have a problem when attempting to claim benefits? Could they be denied because a parent does not qualify as a household employee in our instance? I don’t know the process well, but I assume they will ask her occupation, and may see that her home address is the same as ours, her employer. I would hate to follow this path for 10 years only to find out that her benefits could be denied after paying in all that time.
Hi Gary,
I think you’ve got a good plan.
Hi Mary,
So – each Grandma will have $1800 of income to claim. Just W2 income. Nothing fancy. (Although I’d love to meet your mom!)
You will still need to report that you paid $3600 for childcare on thee 2441 form to avoid being taxed on it. The extra $1400 will automatically go to your taxable income on line 7. (I’m assuming that you’re using tax software.)
You will not have to file a schedule H as there are not payroll taxes.
My mother in law is a permanent resident and she lives with us. Since she has never worked in the US, we would like to pay her for babysitting our 3 year old by hiring her as a household employee and pay the FICA taxes so she can earn credits toward benefits. I understand that it is not required to pay these taxes in this instance, but is it legal for us to pay them anyway so she can receive benefits after accumulating 40 credits? If not, is there another way to accomplish this? Thanks so much for your assistance.
This is the first clear blog I’ve read on this, thank you!
Additional layer of complexity question: We paid both our moms around $1,800 each for nanny care last year (at our home in Illinois). We paid for it out of the dependent care FSA, which we did not use all of (and therefore forfeited the remainder, though my taxable income was still reduced by $5k). If i’m reading this correctly we will need to report the wages paid, but not withhold payroll taxes per schedule H. They will also both need to report it and it would probably be nice of us to issues W-2s to them to make that easier. We also wouldn’t be eligible for the childcare credit as we paid for it with pre-tax dollars, correct? And would we report the $1,400 we didn’t wind up spending as income as well?
Lastly, I might have to send one of them your way as she lives in STL and I’m unfamiliar with how this would impact her state/local taxes.
Hi Tom,
If you had an FSA for $5000 to pay for dependent care, then you must report your child care expenses on your 1040 in order for that $5000 be be tax deductible. Otherwise, it shows up as additional income on line 7 of your 1040.
That means, that you need to report that you paid your mom $2,260. You will report her social security number on the return. The IRS will see that income as having been reported so your mom needs to report that income as well. She does not have to report the money as self employment because she worked for you. You should give her a W2, not a 1099. But not social security or medicare needs to be taken out.
I’m guessing that you paid someone else $2,240 for child care. If not – you’ve still got that remaining amount as taxable income to you.
If you paid another day care over $5,000 – there would be no need for you to report the money you paid your mom, and you could just consider it to be a “gift”.
The bottom line though is that someone is going to have to report that $5000 from the FSA as taxable income – whether its you, your mom, or some other childcare agency.
Now, if you’ve paid some other day care provider
Hi Monica,
Hmmmm. That’s a head scratcher. Do they have Social Security numbers so that you can issue them a W2? If yes, then I’d issue the W2 and claim the child care expense. If they don’t have SSNs, then I’d just be grateful that you had access to really great child care but not claim it on your tax return.
Hi Jan,
Can you help me understand whether my mom needs to report income or not? She watches my son while both my wife and I work full time. I have a FSA which I did $5000 for dependent care. My son started kindergarten this year so the total amount I paid my mother is $2260 for 2016. She doesn’t watch any other kid so it’s not really a business.
Thanks in advance!
Hello,
I paid my parents to come here over the Summer and watched my kids while my husband and I were working. Can I claim that money to the child care tax? They are not US residents.
Thanks!
Monica
Hi Sean,
Your grandmother is not your mom- so if you pay her wages then you have to report it on Schedule H and you have to pay her social security and medicare taxes. If grandma is being claimed as a dependent, then she cannot have over $4,050 in income. So, if you paid your grandmother $4,000 in wages, you would owe $615 in payroll taxes. But remember, if she has other income (outside of social security) then she couldn’t be claimed as a dependent by your aunt anymore.
So, it depends upon how high your income is, what your grandmother’s income already is, and is it worth trying to claim the child care credit for yourself.
I pay my grandma to watch my son, but my grandma doesn’t file taxes and is claimed as a dependent on my aunts taxes. Can I file the child care credit? does my grandma need to file taxes on it? How will this impact my grandma my aunt and mine taxes?
Thank you
Thanks Jan. I had a feeling that was the case. I appreciate the explanation.
That’s so helpful and detailed explanation Mrs. Roberg. Thank you for prompt response,really appreciate your help.
Hi Aakash,
Box 15 is the state you live in. You probably don’t have a State tax ID number, I’m guessing that you’re not withholding state income tax. Box 16 is the amount of income you paid in the state. (This is going to be the same as what you put in box 1.) Box 17 is going to be what you withheld for state income tax – which I’m guessing would be zero. Box 18 is for cities where they have local income taxes – for example, here in the City of St Louis we have a local income tax. Most places don’t have that and you would leave it blank.
Hi CC,
So normally I’d say that no – you don’t need to pay the Social Security – but you’ve got a special situation. So you need to issue your mom a W2, and you will pay the social security and medicare tax on form Schedule H with your 1040 tax return. File the W2 by January 31st.
Hi Ray,
Since you used DCFSA funds, it will show up on your W2. If you don’t prepare a form 2441 with your tax return, you will wind up being taxed on those funds. So – you should prepare a W2 for your mother in law so that you won’t be taxed – but – then she will have to pay tax on that income. Someone will pay tax on that money – whether it’s her or you, but someone will be taxed.
Hi Stephen,
I think I may have mis-titled my blog post. You can hire your parent – to be a nanny withhout paying social security and medicare tax, but not your grandmother.
So, a couple of thoughts for you. First, at $300 a month, that’s $3,600 a year. The social security and medicare taxes would be about $550. I’m guessing that your child care credit would be about $720 (20 percent of the $3600 you pay her.)
But here’s a thought. Your grandmother lives with you, right? And even though she is receiving SSI, I’m guessing that you provide more than half of her support. I figure you pay her $3600 a year, plus room and board – that’s probably half. (Maybe not, but it’s worth exploring.) If you do provide more than half of her support, you could just claim your grandmother as a dependent and I’m thinking that would take about $1000 off of your taxes. (I’m guessing, of course, I don’t know your numbers, but based on averages, I’m thinking $1,000.)
If that works for you, it’s a bigger win all the way around.
Hi Jan,
I am in process of issuing a w2 to my mother for household employee. I am not sure what should i put in box 15 to box 18.
Can you please give the feedback. Also I am using efile4biz for this purpose, let me know if there any better website than this, just worried about how legit it it.
Thank you again
Hello Jan. Thank you for this blog. My mother has taken care of my kids this past year. She just needs 3 quarters for SSN to reach what she needs to start collecting at her age of 67.
I understand that I need to do a W2. I live in Tx. How and when would I need to complete this process so that my mom can claim income on her taxes.
And do I pay extra SSN taxes on my 1040 for the bare min of income she needs for 3 quarters?
I’m trying to figure out all the forms we are going to need and when they are due.
Thank you for your advice.
Hi Jan,
Can you clarify again utilizing DCFSA to pay MIL for child care services. We have a situation where we did use those funds to pay her for 2016 services and each month we had provided her SSN in order to submit for those payments.
First question, does a W2 need to be filed for her?
Secondly, since DCFSA is pre-taxed, is she required to pay taxes on that income? I’ve read on other sites that payment for child care services to family members can be considered as ‘gift’ when filing taxes. Can DCFSA funds be considered as ‘gift’ when used for paying a family member for child care services.
I live with my grandmother and I pay her 300 every month to babysit my twins, she doesn’t file for income take and she receives ssi. If I use her as a sitter for child credit would she have to pay taxes?
Thank you, so much for your prompt response.
Do I (the employer) have to pay SS and Medicare or just her?
Hi Violet,
Your situation is different, you want you mom paying into social security and medicare. I would treat her like a regular nanny and do a W2 with social security and medicare withholding. She can earn 4 quarters of coverage a year. She will need to earn $1,300 for each quarter of coverage so you’ll have to pay her at least $5,200 for the year. You’ll have to give her a W2 and you’ll pay the tax on Schedule H with your 1040 tax return.
Hi.
My mom came to USA as permanent resident in June 2016. She lives with us helping with childcare. I have a 16 month old baby. My husband and I work full time, I am also in school full time. I want her to start contributing for Medicare. What is the best tax option for us?
Thank you.
Hi Abhinav,
I think I understand the question. If Eric pays his MIL the $3000, then he will report the $3000 on a 2441 and he’ll issue his MIL a W2 for 3000 with no withholding, no social security withholding and no medicare withholding. His MIL would report the $3000 on her tax return. If Eric does not pay his MIL – he can still get the money but it will not be reported on the 2441 and he will report the $3000 on line 7 of his 1040 tax return as taxable income.
Now this will be between Eric and his MIL of course. Eric doesn’t really pay his MIL so does she want to claim the income on her taxes? It might make sense to do it. She’s probably in a lower tax bracket than Eric. He would need to volunteer to pay any extra income tax she owed – but I’m guessing it’s less than what he would pay on the money.
Hi Jan,
I want to say you are doing an excellent job running this blog and posting such wonderful information for all the people out there. I do have a question on your answer from Eric’s question that if he claimed that $3000 saying that he paid his MIL then how would he show that money in his tax return because he is claiming the money from his company by saying that he has already paid $3000 to his MIL.
Hope this makes sense!
Thanks,
Abhinav
Hi Eric,
Yes, if you do not use the $3000 to pay your mother in law, you would just pay tax on the $3000. Your 1040 tax return would just show an extra $3000 on line 7.
I’ve read all of the comments, but want to make sure I’m doing this right.
During November of 2015 I elected, during open enrollment, to contribute to the DCFSA. My wife was laid off during maternity leave in January of 2016 and did not find work until July. I kept contributing because we figured once she found a job we would still need childcare.
However, she found a job which affords her the opportunity to work from home. This, as well as help from my mother-in-law (three days a week), means we do not need a daycare. During her open enrollment I ceased contributions but by this point we have around $3000 in there.
I called the administrator and they said to file a claim stating I paid my MIL the $3000 and that she wouldn’t need to claim it as income… which I’m assuming is very wrong. MIL watches my child for free and does not want/expect any pay. This would essentially just be to get my money back.
However (and correct me if I’m wrong), in order to make things easy for my in-laws (FIL has a very fine-tuned tax situation) if I do not provide my MIL a W-2 is it possible to just claim as my own income by not filing a 2441?
Hi Rhea,
You will issue your mom a W2 in January, and submit a W2 and W3 form to the IRS. And here’s the information you need from the Illinois Division of Employment Security. They have a special annual filing you can do for household workers. http://www.ides.illinois.gov/Pages/household_worker_taxes.aspx
Hi Dave,
Thanks. Let’s see if I can answer your questions. First, if you pay your mom but don’t give her a W2 – how should she report it on her tax return? Technically, she should report that as–
Excuse me, my dog decided it was playtime and just jumped up on me and my laptop. Sorry about that.
Technically, your mom would report the income as self employment income on a Schedule C form and pay self employment tax on it. So basically, by not giving her a W2 – you’re raising your mom’s taxes by 15.3%.
Now, here’s what a lot of people do in real life. Granny watches the grandkids because she loves them. The parents give Granny money because they love her. These are all gifts. And as long as these gifts are under $14,000 a year -well then you’re pretty much okay. If you do it this way, you may not claim a child care deduction, because remember, in this scenario you aren’t paying for child care. Now this isn’t good tax advice, but it is what people do all the time. But, technically – if you are paying for a service, and you are, it should be considered reportable income to the person you are paying.
2. Why do you need a W2 to file for health insurance? She might not. It all depends. If she has coverage elsewhere, there’s no issue. For some people, there’s like a black hole of coverage. They have too much money for medicaid, but don’t have income to get the Obamacare insurance. So in a case like that, you need to show some income to qualify. I hope that answers your question. I’d better stop now, my dog is back!
Hi Jan,
This is just the perfect blog I was looking for. I wanted to pay my mom because I want to insure her through the market place. And I can’t do that if I claim her as dependent in my tax return. From your post, it sounds too good to be true. My takeaways are:
1. I can set aside $5000 from FSA for next year and use that money to pay her.
2. I don’t need to pay Medicare and Social Security taxes since I don’t meet the two conditions listed.
3. I might pay unemployment insurance (I have to research this one). We live in Illinois and I need more information.
Is that all I need to do?
Thanks,
Rhea
Hi Jan, great article. Thank you for posting this. I hope you will be able to see my reply and answer my question too.
1) If I pay my mom without W2, how should she report it on her tax return?
2) Secondly, why do we need to use W2 in case my mom needs to use this include this income to file for health insurance? (As you recommended to Mehana)
Thank you in advance….
Hi Mehana,
Yes, if you hire your mother as a nanny, then she will have income to use to file for health insurance on Healthcare.gov. That said, I recommend that you talk with an insurance agent also. I know that there are different rules for different states and different incomes, so you do want to work with someone who is well versed in the the insurance issues. You definitely want to make sure you issue her a proper W2 and do check with your state about state unemployment taxes (SUTA).
Hi Jan,
I am planning to hire my parents(mother) as baby sitter. They already live with us and going to share cost.
Can they use this income on marketplace to get health insurance?
Thank you in advance.
Hi Mrs. Roberg,
Follow-up question on your response to Ann on 01/10 – I do have a compelling reason to pay into social security for my mom – she needs the quarters of employment to qualify for social security in the future. In this case, when I give her a W2 – can I just opt into Social Security and Medicare taxes (15.3%) and not the others? Or do I have to pay other taxes as well? And what would those taxes be?
I called VA and they told me that you normally follow federal, and if you don’t withhold federal, then you don’t have to worry about state.
But what happens in the case I opt to pay into Social Security? What other taxes I and my mom are responsible for?
Thank you so much for your help!
Hi Ann,
Since you are not working, you may not take the child care credit on your tax return. That’s only for families where both spouses work. (Unless you are disabled or in school.)
I don’t think you need to pay medicare for your mom, but if you chose to pay social security and medicare taxes, then you withhold them from her pay and pay that with your Schedule H along with your income tax return.
So, her social security is 6.2% and her medicare is 1.45%. So her total withholding would be 7.65%. So, $11,000 x .0765 = 841.50. So although her W2 would say she earned $11,000, she would have only gotten $10,158.50 because of the withholding.
When you file the Schedule H, you also pay the employer’s additional share. So you’ll be sending the IRS $1683 for your mom’s social security and medicare taxes. ($841.50 for the withholding, and another $841.50 for the employer’s share.) That’s over and above whatever you would pay for your own income taxes.
But, why would you do that if you didn’t have to? You are not required to pay SS and Medicare for your mom, unless you’re under an exception that I’m not seeing.
Unless there’s a compelling reason to be paying into social security for your mom, I wouldn’t. If she needs the quarters of employment to qualify for social security in the future, that would be a reason, but if she was married to your father (or someone else who qualified for social security) she’ll still qualify for some benefits.
Hi,
My husband and I have been leaving with my mother and also paying her to care for our twin babies. Though, I have not yet return to work, can we still report that pay on our tax return, and if so, do we need to provide her with a w2 on that total amount? And the benefit of doing so. I have paid her about 11k thru last year.
Secondly, if she is going to continue to work for me, how do I set up a medicare for her and what’s really the purpose of it?
Thank you,
Hi John,
You will need to get an EIN to file a W2. As far as a easy website, I haven’t used this one, but it looks easy: http://www.efile4biz.com/
I use my professional software so I don’t use sites like this. If you try this one, if you don’t mind commenting here if it’s good or not I’d appreciate it. It might help the next person. Thanks.
Hi Jan,
Additional question related to my post back in October. Next year my son will start normal day care so I won’t have to fill out a w2 for my mom again next year or going forward.
That being said, when I fill out the w2 for this year, will I need to apply for an EIN number? Is there a website that makes filling out the w2 an easy process?
Hi Casey,
It’s perfectly fine for a stay at home grandma to take care of grandchildren for no pay. No money needs to change hands, no paperwork has to be filed. You don’t have to do the W2 thing.
You only have to do the W2 thing if your daughter is paying you and she’s claiming the deduction on her tax return. I’m thinking that your daughter’s income may be low enough that the tax credit isn’t needed for her.
If your daughter does need the tax credit, then of course she can pay you – of course making sure that she doesn’t pay you more than disability allows.
Hi there, So I have a 22 year old daughter whom lives with us, she is a single parent, she also pays half the rent. I don’t work (actually trying to file for disability) so being a stay at home grandma what can we do what is the best option for us.
Hi John,
You should prepare W2s just so that your Mom has the proof of income. It also give you proof to the FSA that you really did pay that money. But you’re right, you don’t need to file schedule H.
You may need to report what you paid your mom on your tax return because it should show up on your W2 in box 10. If you don’t report it, the amount it box 10 will get added back to your income on line 7. So you won’t be filing a schedule H, but you will be filing a form 2441 for he child tax credit. No, you won’t get the tax credit, but it will keep you from having to pay tax on that FSA money.
Follow up. If I don’t do schedule h would I have to put somewhere on my taxes that I paid her even though it would all be reimbursed to me by fsa.
Thanks
So I’m in the category where my mom is exempt from the taxes. I’m paying her with an fsa. Do I still fill out schedule h and send her a w2?
Hi Bob,
The Social Security/Medicare credits are based on the annual wage so it doesn’t matter if you pay your mom through the course of the year or in one lump sum in December. And, since you’re reporting her income on a Schedule H on your tax return, you’re not filing quarterly 941 forms so it makes that an even easier option there.
If you use her income to make HSA payments, then that income won’t be taxable to your mom, but it also won’t be taxable for Social Security/Medicare credits either – so that might defeat the purpose of what you’re trying to achieve.
And there’s one more thing–Medicare isn’t free. Medicare part B costs $104 a month. She can sign up for the Part A – hospital insurance for free only, but is she changes her mind and wants part B later, it costs more. (My mother in law was living out of the country and chose not to take Part B, moved back and needed it but it was much more expensive. Hindsight being 20/20 I’d recommend signing up for Part B when she signs up for part A.)
Hello.
My mom lives with us. I would like her to start earning medicare credits now, so that in another 10 years (she will be 69 then), she will be eligible to get medicare free of cost.
It seems I can employ her as a babysitter, paying her $5K per year, and choosing to pay FICA taxes (even though she qualifies for the parental exemption). I understand from this thread that it would be perfectly legal to opt to pay those, even though it isn’t required.
1) Can I just run payroll in December, paying her the $5K in one lump sum? Or does it need to be distributed through the year, quarter by quarter, for the purposes of obtaining credits?
2) Can we direct some of this payment into an HSA to use for medical expenses at the present time, thereby reducing tax liability? Or will this reduce the “medicare wages and tips” and hence defeat the purpose?
thanks
Hi Tom P,
If you mother in law is truly a contract laborer, then you have no say over what she claims on her tax return. Sorry, I know that sounds harsh, but as an independent contractor-well you have no say as to what a grandmother should buy for her child versus what she should buy for business.
Why don’t you just gift her the $90 a week and drop the whole “business” of providing the day care. The money you lose on the tax credit would be saved on the cost of her tax return with all the accounting.
Can you get daycare in Texas for only 90 a week? It’s way more expensive here in Missouri. I think you’re getting an amazing deal.
And this is unrelated to taxes but I think it’s really important. You’re quibbling over diaper costs? You make your mother in law pay for diapers for when she’s on her own time with her grandson? Are you serious? I would have given my eye teeth to have a grandparent for my kids and you expect your mother in law to pay for diapers when she’s got them on her own time? I deleted your last name because you should be embarrassed. Diapers are a parent expense. Seriously. Don’t look a gift horse in the mouth. (That’s something us old people say. Ask your mother in law, she’s probably heard the expression before.)