Child Care and Taxes

I agree with Jo. I went through a similar situation and my tax guy said it is better for both parties to give them a free week of babysitting. Do they pay you even if you don't have him? If not then they are already getting a break they wouldn't get from any other daycare so along with the free week they should be pretty happy and you won't get the shaft at tax time!

Did they know that you were not claiming it on your taxes? Did they know that it was "cash under the table"?

If they did, and NOW they want to a deduction, then you need to tell them that they have to find other arrangements. You are getting screwed.

They got cheaper daycare by paying you cash. They can't have their cake and eat it too - either they pay you more so that you are earning enough to do the work, OR they go elsewhere and pay someone else and take their deduction.

Dawn

Let's do the math on this. If they are using the dependent care credit, they can deduct a maximum of 35% of $3,000, or $1,050. But how much they can actually deduct depends on the their income - if their AGI is over $43K they can only claim 20% of $3,000 or $600. This is a credit and not a deduction, so that means that every dollar of the credit reduces their tax liability. So this means that by claiming these expenses, they save at least $600 and at most $1,050.

If they have a child care flexible spending account at work then that's a little different - they basically wouldn't be paying income tax, SSI or Medicare on $5000 of income. So if they were in the 25% tax bracket, they would save appx 32% (taxes plus SSI and Medicare), which equals $1,632.

If they are just taking the credit and not using an FSA, there is no need for them to report more than $3,000 in childcare expenses. In theory, then, there is no need for you to report more than $3,000 in income. Whether or not that's morally right is not my place to say. If you were to have to claim $3,000 in income, set aside 25% of that (or figure out your actual tax rate from last year and use that as a guideline - $3K probably won't change your tax bracket but if you were on the cusp of a bracket last year it might).

My husband was a self-employed independent contractor and filed taxes as such for many years before he actually set himself up as a business. That process was very simple and did make accounting easier as he had a separate business account for his income and expenses but it's not necessary. You can file self-employment income taxes without legally establishing a business. Definitely deduct any expenses, including food, supplies, and mileage (if you bring him anywhere). The "home office" deduction can be tricky - if you have a designated space in the home, perhaps a play room, that you don't use for other purposes because you watch him then it is claimable. Say that space was 10% of your home, you would be able to deduct 10% of your mortgage interest and utilities such as heat and electricity.

Hope that helps!

I absolutely claimed daycare on my taxes, and when I provided in-home childcare I absolutely kept a receipt book and made out daily receipts for each child's parents (and at the end of the year typed a form with my tax ID and the amount they paid for the year). Childcare adds up! $150/week is $7,800 and that is a pretty substantial deduction for some people, so it's only fair that they claim it. It is also only LEGAL that you claim your income.
Whether it saves a lot or not is beside the point, we have to be super anal about doing everything "by the book" because my husband is in finance and we don't want to take a chance on making a mistake that could cause him to lose his license. AND it's just.....the right thing.

As to how much you set aside? Take into account how much your annual income is, including the childcare (are you married? does he work? do you have other income?) and see what tax bracket that would place you at (you can look that up online). Would you pay 15%, 20%, 25%.....whatever it is, you can just take that off the top of your weekly income and bank it. I kept receipts for EVERYTHING I used towards childcare (supplies, food/drinks since I fed them, mileage and gas since I transported them to/from school, etc) and placed those receipts in an envelope for every month of the year, and kept it in a "childcare folder" in my filing cabinet. My receipt book (carbon copies, got it at Office Depot for cheap) stayed on my desk. With the help of that file folder and my receipt book, I was able to take care of taxes and also deduct a little myself. I put what I was saving in our "tax account" where we earn interest off it all year long, before time to pay. Better me getting interest for a year than the government, in my opinion.

There may also be things you can deduct to offset some of the tax liability.

You don't mention how old he is, but you can usually deduct a standard amount for meals/snacks, for example.

Keep track of any supplies you buy for him.... wipes, ointment, toys, etc. Those should all be tax deductible. The mileage to purchase those items could also be deductible.

If this is your only income, most likely it won't be much...... if you add it all up, you are making $7800 a year...... It could raise your joint tax liability, but that could depend on what your partner makes.

As an estimate, go to your tax papers from last year, and "do" them again, and add about $8,000 ...... see what the difference would be. There are a number of online tax programs you can use for this.

B.:

If they claim this on their taxes...you will need to claim it as income on yours.

You can go to the IRS website (http://www.irs.gov) and figure out how much you will have to pay in Federal, state and Social Security taxes.

Without knowing your tax bracket, I would say set aside 25% for taxes. If that's too much, you'll get some of it back...I'm in the camp that would rather have paid too much instead of not enough.

You can also talk to a tax accountant too. I know it's not a lot of money - but it does add up.

If you are watching him in your home, you should look into a deduction for a portion of your mortgage for a home workplace. The available deductions may make it worth it. That and not evading taxes, of course.

From the IRS: http://www.irs.gov/businesses/small/article/0,,id=117613,...

"Childcare providers. If you provide child care, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. If you are not an employee, you are probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it."

You'll need to just make sure that when you file your taxes you add your income in. Your husbands paying in during the year should actually be enough.

If you're not married then this income should not effect you. Most single non working people get tax credits and extra refunds on their own kids and stuff.

If you are in neither of these categories then you need to call the IRS and ask them.

All parents are supposed to get the benefit of claiming any money they pay for babysitting and even if a babysitter does not know they do this it doesn't really effect them a lot. In your case they may ask you for your ss# to put on the tax forms. Then it will go back to you.

I do not call each babysitter I have used over the year when it comes time to fill in the blanks for taxes. I estimate it. Unless it is regular full time care. Then I make sure to include the SS# of the primary care giver.

If I were you and expected to pay in income tax on regular income coming into the home then I would put at least 10% in savings to cover taxes.

If you want to do this more effectively then get a tax ID # and open a small business account at the bank. ONLY, seriously, ONLY deposit the money from babysitting. Then each quarter the bank will help you send in taxes on the money that went through the account. So if you put $50 from a garage sale or a refund from taking a dress back you will be paying income taxes on that deposit. Only money from babysitting goes in it.

Each item you buy from this account that is to go towards the business of babysitting needs to be accounted for too. Food, cleaning supplies, phone costs, a portion of your house payment, utilities, and repairs will be allowed too, there are all kinds of rewards for actually doing this like a business. The federal tax ID will also allow you to get more discounts on your supplies too. You can only benefit from doing this like an actual business.

This way they have a clear set of totals to see. Money coming in and the money you spent on the business. The percentages you will get a discount on will vary from item to item. I got a lot of my phone bill written off due to not using it for much of anything except the EBT machine.

At the very least it will benefit you to make an appointment with a CPA or someone like H R Block to discuss how much you might have to hold back in savings but I expect you won't have to pay anything extra.

If the income puts your household income in the next tax bracket up you may want to let brother take little one to someone else. In Oklahoma a baby would only pay $14.50 up to $25 per day. Our child care is pretty close to yours, you do have a bit higher pay than us but I bet they could find someone else for close to the same if they looked into licensed child care. I can't imagine Kansas being much higher than Oklahoma.

I know that you are supposed to contribute $100 for every $1,000 you earn to social security. After that, I sock away 1/3 for taxes.

You need to be careful with this. Depending on where you live, it could be illegal for you to watch children without a license and you could get in trouble! That warning aside, if they are asking for a receipt and it's legal for you to watch him with no license, you should definitely consider claiming stuff on your taxes for a tax break. I actually got more money back when I was a licensed childcare provider becuase we paid in on taxes through my husband, then claimed my income but also wrote off a lot of expenses for my house such as electricity, part of our mortgage, food, cable, becuase those items were used in my daycare business. Just be ware that if it is not legal for you, if they claim it on their taxes and you aren't license you could get in trouble for operating a childcare operation without a license. HTH

You should place a third of it in a savings to pay your taxes.Third = $50 a week.