Your mother-in-law may hire you as an employee or as a self-employed contractor.
A general rule is that anyone who performs services is an if he/she is not in control what will be done and how it will be done.
Facts that provide evidence of the degree of control and independence fall into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker's job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
There will be less paperwork if you are self-employed contractors. You may sign an agreement with your mother-in-law for providing services - not for working specific hours. In this case your mother-in-law doesn't need to file the form 941 (which is filed by employers.
You may have EIN for your business - in this case you will use it on the schedule C - http://www.irs.gov/pub/irs-pdf/f1040sc.pdf - see header box D, but you are not required to have it.
If you are self-employed - you will use schedule C for your self-employment income and expenses - http://www.irs.gov/pub/irs-pdf/f1040sc.pdf and calculate your net income. You net income from self-employment is a subject for 15.3% self-employment taxes and should be calculated on schedule SE - http://www.irs.gov/pub/irs-pdf/f1040sse.pdf
You will use 1040 form - http://www.irs.gov/pub/irs-pdf/f1040.pdf for your tax return - following would be important entries:
- line 7 - wages from W2 box 1 - as he also has a regular job.
- line 12 - net business income from the Schedule C
- line 27 - one-half of self-employment tax from the Schedule SE
- line 56 - self-employment tax from the Schedule SE
The key point is to determine qualified business expenses and to keep a good record.
Let me know if you need any help.