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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22838
Experience:  Taxes, Immigration, Labor Relations
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Family Member as Household employee

Resolved Question:

My parents are currently living with us and take care of my baby during the hours my husband and me both working. We claimed them as dependents last year and paid them for caring of the baby as gift. Next year I would like to pay my mom out of my dependent care flexible spending account for her taking care of my baby when we are at work (not claiming my mother as dependent). May I still claim my father as dependent if my mom and daddy file married jointly?
I am going to pay my mom as household employee. According to publication 926, it seems that I don't need to pay employment tax for her. Do I understand correctly (child under 13, both me and my husband are healthy and go to work at daytime)? If so, how should my mom claim this income (ordinary income)? How many social security tax she need to pay(rate)? Do I still need to give her W-2? Are there any option and choice for this tax issue? Please advice. Thanks.
Submitted: 7 years ago.
Category: Tax
Expert:  Lev replied 7 years ago.

According to IRS publication 926 and you are correct - you should not count wages you pay to your parent as social security and Medicare wages, even if these wages are $1,500 or more during the year unless both the following conditions apply.

Your parent cares for your child who is either of the following.

  • Under the age of 18, or
  • Has a physical or mental condition that requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter.

Your marital status is one of the following.

  • You are divorced and have not remarried,
  • You are a widow or widower, or
  • You are living with a spouse whose physical or mental condition prevents him or her from caring for your child for at least 4 continuous weeks in a calendar quarter.

However these wages are taxable income for your parent and should be reported to IRS. You need to submit W-2 form that would report zero in SS and Medicare wages fields.

Customer: replied 7 years ago.
Reply to Lev's Post: Is that mean I can pay my mom as household employee out of my dependent care flexible spending account and don't need to pay employee tax for her? And also she doesn't need to pay self employee tax and only treat this income as wages? How and when does she pay her portain of her social security tax for this income?

This option sounds better than claim her as self-employee.(no employer part of social security tax).   What's the drawback?

May I still claim my father as my dependent then?
Expert:  Lev replied 7 years ago.

This type of wages is not subject to FICA taxes, it is not a subject of FUTA tax - please also see Circular E page 8 - http://www.irs.gov/pub/irs-pdf/p15.pdf - so when issue W-2 form for her you need report zero in SS and Medicare wages fields.

Please be aware that according to IRS publication 503 page 7 - http://www.irs.gov/pub/irs-pdf/p503.pdf - You can count work-related payments you make to relatives who are not your dependents, even if they live in your home. However, do not count any amounts you pay to a dependent for whom you (or your spouse if you are married) can claim an exemption.

For your another question that I overlooked - sorry - May you still claim your father as dependent if your mom and daddy file married jointly?

According to IRS publication 501 page 11 - http://www.irs.gov/pub/irs-pdf/p501.pdf - you may not in general claim as a dependent a married person who files joint return - see some exemptions there but seems they are not apply to your situation. Also, if you are living in community property state - 1/2 of wages earned by your mom would belongs to your father.

 

Customer: replied 7 years ago.
Reply to Lev's Post: Thanks for your answer. I would like to confirm with you two more things.

1. If I don't claim my mother as my dependent, I can pay her out of my dependant care flexible spending account, yes?

2. If my parents file married separately, I can still claim my father as my dependent because I pay all his expense, is that correct?

All by All, do you think this will work out and save me some tax dollars because I need to pay my mom for caring of my baby any way? or is it better to treat it as self employee payment or gift?
Expert:  Lev replied 7 years ago.

1. this is correct - however as I stated above if otherwise your mother is your dependent (it doesn't matter if you claim her as a dependent or not) - these expenses are not eligible for Child care expenses deduction. It wouldn't matter if you mother is employee or self-employed.

2. If your father filed a separate return or doesn't file return at all (assuming he is not required) you may claim him as a dependent if other tests are met.

All by All, I think that the difference in claiming your mother as a dependent and claiming Child care expenses deduction would be relatively small. In additional you will need to convince administrators of your dependent care flexible spending account that all above is correct. They may have more strict rules that IRS required. There are other deductions that qualify for Child care expenses deduction - summer camp, some after school activities, etc. Finally, even all these is not a violation of law - it is sounds as not a regular practice and would draw additional attention.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22838
Experience: Taxes, Immigration, Labor Relations
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