How to pay Mother in Law to babysit/daycare

[mustachedad]

Hello all,

Wife and I have twin boys on the way. Her mother is planning on retiring to stay with us to watch them during the day and we plan on doing this for the first 3-4 years. My biggest question for you financial experts is how should we pay her? I'm thinking under the table would let her keep most of the money, but that doesn't let us claim any of it for taxes. If she claims it as income, I'm guessing we can claim it as a childcare expense come tax-time and get a little back... but that makes her pay taxes on it.

I'm really after the best solution for everyone (wife, myself AND her mother). We will be paying her somewhere in the neighborhood of $350/week if that makes a difference.

[chasesfish]

Personally, I'd do it as a gift and your amount would be under the gift tax exemption.

If you "pay" her, you have to handle payroll tax deductions plus you're responsible for an additional 6.2% employer contribution towards social security.   

I'd take the stance of she's doing this because she's grandmother and you are blessed to be able to support your mother with X in a gift annually.  I can't see the IRS challenging that, but its just my two cents

[MayDay]

Agree that you should just gift her.

Many legit* nanny setups do a combo, i assume so people can take the childcare deduction but the nanny gets some tax free. Maybe so they can avoid getting in trouble for the under the table side. So like 10$/hour is reported and the nanny gets another 10$ cash.

*By legit I mean you are hiring an employee who is professional nanny.

Personally we use part time students so we just pay cash and don't worry.

[AccidentalMiser]

Personally, I'd do it as a gift and your amount would be under the gift tax exemption.

If you "pay" her, you have to handle payroll tax deductions plus you're responsible for an additional 6.2% employer contribution towards social security.   

I'd take the stance of she's doing this because she's grandmother and you are blessed to be able to support your mother with X in a gift annually.  I can't see the IRS challenging that, but its just my two cents

If they gift it to her, they can't count it for the dependent care tax credit, that's the point the OP is making. 

Here's an actual answer to your question from the IRS, who won't bum dope you with incomplete, erroneous or irrelevant advice like I will:

https://www.irs.gov/faqs/childcare-credit-other-credits/child-and-dependent-care-credit-flexible-benefit-plans

I think the bottom line is that if you're going to claim the tax credit, you are going to either pay her as an employee or an independent contractor which will trigger some social security payment and other tax implications in either case. 

[SKL-HOU]

I don’t think you can claim paying you MIL on taxes no matter what. I would check IRS before making plans.

[LouLou]

Check with the IRS.

For anecdata, we have the same setup. My mom lives with us, watches our little while we are at work, and cleans our house. She gets free room and board. We have a separate account for groceries for the whole house hold, she has a debit card for it in her name to get whatever food she wants within the budget. We gift her a car stipend for gas and oil changes. We also gift her a monthly stipend for spending money.

We do not claim the tax credit. But the benefits of having our daughter cared for by someone who loves her, and never doing day care drop offs and pickups are well worth it!

[affordablehousing]

We paid the MIL over the table to make use of our dependent care flexible spending account. We paid her what her expenses were for gas and food so she could deduct all income as expenses, and we could not make her feel like she was spending money to take care of our kid (she lives far away) plus we can use pre-tax dollars from our account. Win-win.

[charis]

I don’t think you can claim paying you MIL on taxes no matter what. I would check IRS before making plans.

Why would this be the case?

[robartsd]

I'm really after the best solution for everyone (wife, myself AND her mother). We will be paying her somewhere in the neighborhood of $350/week if that makes a difference.

I agree with considering weather or not you want to claim that she is giving you childcare and your are giving her money or if you are paying her for childcare. $350/week works out to more than $18,000. If you each gift her $175/week (or you take turns gifting her $350 each week) you stay under the annual gift exclusion limit of $15,000. If one of you gifts her $350/week for a full year, you'd be required to start deducting the gift from your $11 million lifetime exclusion.

[mm1970]

You won't be able to deduct on your taxes unless you pay her as a nanny - this means she will have to claim it as income and you will also have to pay SS taxes on it.  I have many friends with nannies.  Only a few have ever gone this route - many prefer a nanny share, which gets around that (nanny works for family A on M/W/F and family B on Tue/Thu).

[charis]

You won't be able to deduct on your taxes unless you pay her as a nanny - this means she will have to claim it as income and you will also have to pay SS taxes on it.  I have many friends with nannies.  Only a few have ever gone this route - many prefer a nanny share, which gets around that (nanny works for family A on M/W/F and family B on Tue/Thu).

I may be misinterpreting your post, but one can't get around tax issues by sharing a nanny.  Whether it's an after school babysitter once a week, a full time "nanny," the gardener, or someone by any other title that you pay to work in your home, they are considered household employees when you reach the $ threshold set by the IRS, regardless of which days they work.

[rockeTree]

Will you be claiming MIL as a dependent? Might make up for the child care credit a bit to do that and give her an allowance as a dependent instead of pay, would want to think about impacts on your taxes and hers of course.

[mm1970]

You won't be able to deduct on your taxes unless you pay her as a nanny - this means she will have to claim it as income and you will also have to pay SS taxes on it.  I have many friends with nannies.  Only a few have ever gone this route - many prefer a nanny share, which gets around that (nanny works for family A on M/W/F and family B on Tue/Thu).

I may be misinterpreting your post, but one can't get around tax issues by sharing a nanny.  Whether it's an after school babysitter once a week, a full time "nanny," the gardener, or someone by any other title that you pay to work in your home, they are considered household employees when you reach the $ threshold set by the IRS, regardless of which days they work.

Ah, I stand corrected.  A little google tells me that they are cracking down on all of that.  I know locally, you can't even nanny share (as in, have a single nanny caring for children from more than one family), without being licensed.  Thus, most people I know who only need part time child care just pay people under the table.

I did find this, it's clear as mud!

https://www.marketwatch.com/story/tax-rules-for-hiring-family-members-2012-03-27