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Phillip B, EA
Phillip B, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 704
Experience:  Practicing since 2004. Expert in 1040, small business, represent vs. IRS, & int'l tax mattters.
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I live in California. My cousin baby sits my daugther

Customer Question

I live in California. My cousin baby sits my daugther for me a two days a week while both my husband and I are at work. We plan to give her $5000 a year. She will be watching my child at her home. Is she classified as a independent contractor and so I
issue her a 1099 MISC form at the end of the year? I'm unsure what to do, its not that much money but I wanted to be sure we both weren't penalized on our taxes. Thanks!
Submitted: 2 years ago.
Category: Tax
Expert:  Phillip B, EA replied 2 years ago.
Thanks for using! I will do my best to provide you with a clear and concise answer to your tax question based on the information that you have provided.
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.
If there are other questions or concerns, please reply to this answer so that I may assist you further. If this answers your question, please rate my performance between OK and Excellent Service so that I may receive credit for my work. Thanks for your business.
Expert:  Phillip B, EA replied 2 years ago.
A colleague pointed me to an article about this very issue.
Given that the babysitting is performed out of your home, you should treat her as an independent contractor.
Here is a link to the article if you would like additional information on this subject: