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In this situation, you will have your cousin give you a signed form W-10 Dependent
Care Identification and Certification. When you file your tax return
, you will report what you paid her on your child care credit form 2441
. You may want to provide her with a 1099-MISC
to help her know what you paid her for the year, but you would not be required to send a 1099-MISC to the iRS
or your cousin. She will be able to deduct any babysitting expenses that she may incur if there are any (she could take a special home office expense for day care providers that allows her to deduct a larger than normal portion of her home expenses). Unfortunately, she would pay self-employment
tax of 15.3% on any net (the 5,000 dollars gross that you pay her minus any expenses she finds that she can deduct).
The other option is giving her a W-2
. You would still claim the child care credit on form 2441, but you would also withhold social security and medicare
tax from her gross pay and you would pay a matching portion of those taxes out of pocket (7.65% from her pay and you would 7.65% of 5,000 dollars gross pay). The employment tax you pay would be includible as part of the child care expenses for the child and dependent care credit. Your cousin would not be able to deduct expenses, but she wouldn't need to worry about self-employment tax either.
Since she is watching your daughter at her house, you could reasonably choose to treat her as an employee or as an independent contractor. Treating her as being an independent contractor is the simplest option, but it may cost your cousin more money.
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