Author: Trudy M. Howard
QUESTION: Can I claim the money I pay my mom to watch my children after school? She is on S.S. and I would not want to impact her benefits as she is retired. I pay her $260 a week.
ANSWER: With the IRS most answers usually begin with “it depends” and this is one of those answers; it depends. There are several moving parts to this scenario that will determine the tax benefit/liability to you, and the tax benefit/liability to your mom. Tax liability is determined by figuring what location the child care is taking place in, your marital status, the age of the child, and your mom’s total income. It is unclear to me if you have a business, and you are wanting to “claim the money” as in deduct the total amounts paid from your taxable income as a business expense (which you cannot do), or if you want to “claim the money” for the dependent care credit. I’ll get into the dependent care credit later in the article, but for now, let’s start with is your mom an employee, or an independent contractor.
If your mom is doing the babysitting in your home, you may be considered a household employer, and you will NEED TO PAY EMPLOYER TAXES on the money that you paid to your mom. Employer taxes are Federal Unemployment taxes of 6% of the first $,7000 in wages, 6.2% for Social Security, and 1.45% for Medicare. However, as with everything concerning the IRS there is an exception to this rule. You do not have to count the wages paid for social security and Medicare taxes if:
- The child is under 18 years of age, or has physical or mental condition that requires the personal care of an adult for at least 4 continuous weeks, AND
- You’re divorced and haven’t remarried.
- You’re a widow or widower.
- You’re 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 the calendar quarter services were performed.
If your mom is watching your child outside of your home, (say you are dropping your child off to your mom), then your mom would be considered a “self-employed person” which means that she will need to pay self-employment taxes on her income. The reason she will need to pay report and pay self-employment taxes is because she would have earned over $400 in self-employment income.
TAXES MOM WILL HAVE TO PAY.
Because your mom is self-employed, she would have to pay SELF EMPLOYMENT TAXES in the amount of $1,591.20 (calculated using the 20% qualified business income deduction only, not with any business expense deductions), and if she has over $25,000 in income (social security income plus self-employment income), she may also have to pay INCOME TAXES on the earnings.
TAX BENEFIT TO YOU:
By paying your mom to watch your child, you may be eligible to claim the nonrefundable child and dependent care tax credit. The Child and dependent care tax credit ranges from 20%-35% of either $3,000 or $6,000 depending on your adjusted gross income. A qualifying individual for the child and dependent care credit is:
- Your dependent qualifying child who is under age 13 when the care is provided.
- Your spouse who is physically or mentally incapable of self-care and lived with you for more than half of the year.
- An individual who is physically or mentally incapable of self-care, lived with you for more than half of the year, and either: (i) is your dependent; or (ii) could have been your dependent except that he or she has gross income that equals or exceeds the exemption amount, or files a joint return, or you (or your spouse, if filing jointly) could have been claimed as a dependent on another taxpayer’s 2018 return.
Once your AGI (adjusted gross income) is over $43,000 the max tax credit you will receive is $600 for 1 child, and $1,200 for 2 children. Each child must be under the age of 13. This credit is nonrefundable, so if you have a $0 tax liability & you receive the $600 credit, you would not receive a tax refund check for the $600.
CAN YOU DEDUCT THE TOTAL $13,520 FROM YOUR TAXABLE INCOME?
Per IRS PUBLICATION 926 The deduction that can be taken on Schedules C and F (Form 1040) for wages and employment taxes applies only to wages and taxes paid for business and farm employees. You can’t deduct the wages and employment taxes paid for your household employees on your Schedule C or F.
WILL THIS MONEY HAVE AN IMPACT ON YOUR MOM’S RETIREMENT BENEFITS?
There are several types of retirement income. Pension, 401k, IRA, Annuities, Social Security, SSI, Social Security Disability, Disability Payments from a Privately Owned Insurance Plan, etc. For purposes of this article I will be focusing on government sponsored retirement plans.
SOCIAL SECURITY RETIREMENT INCOME: –If your mom’s is unmarried, and her base income (including social security and all other income) is $25,000 or less, she will not have to pay any INCOME tax (remember income tax and self-employment taxes are two different taxes).
Per the benefits planner retirement section on the social security website, if your mom is at full retirement age she can earn as much as she wants, and have unlimited resources and still receive her benefits. However, if your mom is younger than full retirement age and makes more than the yearly earnings limit, her earnings may reduce her benefit amount.
“(Full retirement age is 66 for people born between 1943 and 1954. Beginning with 1955, two months are added for every birth year until the full retirement age reaches 67 for people born in 1960 or later.) If you are under full retirement age for the entire year, we deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2018, that limit is $17,040.”
To find out whether any of your benefits shown on Forms SSA-1099 and RRB-1099 may be taxable, compare the base amount (explained later) for your filing status with
the total of:
- One-half of your benefits, plus
- All your other income, including tax-exempt interest
SOCIAL SECURITY DISABILITY: –This benefit is based on an inability to work, and work history. Per the disability section on the social security website: “Social Security Disability Insurance pays benefits to you and certain members of your family if you are “insured,” meaning that you worked long enough and paid Social Security taxes.” While there are limits on what a person can earn while on disability, they can receive help from outside sources and retain their benefits.
SSI–SOCIAL SECURITY SUPPLEMENTAL INCOME--The Supplemental Security Income (SSI) program pays benefits to disabled adults and children who have financial need, and limited income/resources. This benefit pays a small amount to those that are disabled, but don’t qualify for regular social security disability. The basic monthly SSI payment for 2019 is the same nationwide. It is:
—$771 for one person; or
—$1,157 for a couple.
Not everyone gets the same amount. You may get more if you live in a state that adds money to the federal SSI payment. You may receive less if you or your family has other income. Where and with whom you live also makes a difference in the amount of your SSI payment. SSI eligibility is based on a person’s access to money & assistance, (aka means, aka support, income, total household income), and per the SSA “Income is any item an individual receives in cash or in-kind that can be used to meet his or her need for food or shelter. Income also includes (for the purposes of SSI), the receipt of any item which can be applied, either directly or by sale or conversion, to meet basic needs of food or shelter.” Resources are limited to $2,000 for single people.
Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.
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