Several issues...
For the person to report her self-employment income - there is no need to have a form 1099-misc. So that is that person choice - not to report the income and not to pay self-employment and income tax on that income.
You are correct - if the income is not reported and neither employment nor self-employment taxes are paid - the person would not have any credits for social security or unemployment purposes.
As you consume the service for personal needs - not in the course of business - you are not required to issue the form 1099-misc.
The separate issue - if that person your employee or self-employed.
Generally in the home care occupation - if the person works in several places - means provided a service in the business manner - he/she is self-employed. If however the person works only for you - he/she is your employee.
The IRS publication 15 - http://www.irs.gov/pub/irs-pdf/p15.pdf is the main document that addresses employee status - page 7. A general rule is that anyone who performs services for you is your employee if you can control what will be done and how it will be done. This distinction is important because an employee and self-employed are taxed differently.
The IRS has developed a list of factors which are used on a case by case basis to determine whether a worker is an independent contractor or an employee for IRS tax purposes. The twenty common law factors of a perfect independent contractor relationship that are published here - http://www.wwwebtax.com/general/independent_contractor.htm
If we determine that you have a household employee - you might want to become familiar with IRS publication 926 - http://www.irs.gov/pub/irs-pdf/p926.pdf
If you pay cash wages of $1,700 or more in 2009 to any one household employee - you should withhold and pay social security and Medicare taxes.
If you pay total cash wages of $1,000 or more in any calendar quarter of 2008 or 2009 to household employees - you should pay federal and state unemployment tax.
Let me know if you need any help.
Thank you very much for your detailed reply. Upon review of the IRS definitions, I don't believe my helper meets the definition of an employee. Obviously I am not running a business but in terms of the household help, I do not control what she does or supervise. I basically pay her a fee a week and she works independently when caring for my mom. She has a regular job with an agency and works with another client a few hours a day. So it would appear that self-employed is more appropiate than employee. I also do not set her hours and she often brings in her supplies such as food for meals.
I keep copies of each canceled check with a note for "Home Care". Could she just report the gross wages on her tax return as self-employed income for services? I do not want to issue a 1099 if I don't have to nor do I feel I am required to pay federal & FICA taxes because of the employee situation. My feeling is that I should advise my helper to consult with her tax advisor in terms of paying estimated taxes? Do you agree?
Two more quick questions - My mom is my dependent for tax purposes. Is there some type of (elder) care credit or deduction available for paying a third party for home companionship / health aide services? If yes, would I face any exposure if the third party person I pay for services is not through an agency or employee ? I just want to make sure I don't get into trouble with the IRS and I want my helper to get credit for SS. Thanks again for your time!
As you identified that the person is not your household employee, but is in business of providing home care services - such person is self-employed.
As you are not in the business of providing home care services - but simply consume the service - you do not need to issue the form 1099-misc
Based on the above - that person should simply file schedule C reporting self-employment income, expenses, and schedule SE to calculate self-employment tax on net business income (15.3%)
In additional - net business income will be added to all other income and income taxes will be calculated.
To cover tax liability - the person may either increase withholding on the day job or pay estimated taxes - use schedule ES.
The issue that often arises in similar situations when the person disagree with self-employment status and would request you as an employer to pay at least portion of employment tax.
If the person will file a complain - in most situation the employer would be eligible for 15.3% employment tax, unemployment taxes (federal and state) plus penalties and interest.
As your mother is your dependent - you may claim medical expenses on the schedule A - assuming partial payment is for medical care.
You also may claim the Child and Dependent Care Credit - for qualifications - see IRS Publication 503 - http://www.irs.gov/pub/irs-pdf/p503.pdf
The maximum expenses you may used to calculate a credit - $3000.
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