Federal tax policy and implementation

Ned and Marge's Taxes

Ned and Marge Childcare Transactions and Taxation

Ned, Marge

Thank you for your concern for accurately reporting taxes for this previous tax year. In the following response, your specific cases have been considered.

As Ned has been paid in the amount of $95,000 by Marge for childcare for Maggie, under IRS regulations, if Ned babysits for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to him. Under this section, it requires that Ned pay self-employment taxes on the received monies for childcare. This means that he will be required to pay Social Security and Medicare taxes in the amount of 15.3%. This will be reported on Schedule SE Form 1040. Minus the 15.3% taxation, Ned's income would be $80,465, however, half of the tax should be eliminated in determining his adjusted gross income, which means at a 7.65% tax rate, Ned should report $87,732 as his adjusted gross income.

Ned should also be aware of Form W-10, Dependent Care Provider's Identification and Certification for the purpose of claiming that for tax purposes, his name, address and taxpayer identification are correct. He should hold onto this form for his records and be prepared to present it to Marge when necessary. He may also qualify to claim expenses incurred in caring for Maggie, such as the use of his food, home, and toys. This W-10 should be filled out in conjunction with Form 1040.

Because of SECA, or Self-Employed Contributions Act, Ned does not need to worry about FICA. The 15.3% tax he pays covers his FICA requirements. In order to receive credit for the donation of his income, Ned will need to fill out a Schedule A, Itemized Deductions. This allows charitable donations to religious organizations. Ned will need a statement from the church claiming the amount of contribution, as it is over $250. Unfortunately, Ned can only deduct 50% of his adjusted gross income per Publication 526. For this tax year, Ned will need to claim half of his adjusted gross income, despite his contribution of it to the church.

Because Marge has hired Ned, Ned is her employee. She will need to fill out a Schedule H, as he works part of the time in Marge's household. She will also be required to file Form W-2, as she paid him more than the minimum $1,700 in cash wages subject to Social Security and Medicare. Because Marge works and must pay child care expenses and someone else cannot claim Maggie as their dependent, Marge is able to claim the Child and Dependent Care Expenses Credit, per Publication 503. Depending on what particular state Marge and Ned reside in, Marge could be required to pay state unemployment tax as well, so she will need to keep this issue in mind when filing her state taxes. Publication 926 provides further contact information about regarding state unemployment tax agencies.

Marge will want to ensure that she keeps her liabilities to a minimum. As it is unlawful to employ aliens that cannot legally work in the U.S., she will want to verify the status of Ned. Even though it is probably assumed that he is able to work, she will want to follow the suggestion of the Schedule H. suggestions form for Household Employee Taxes, and require Ned to complete Employment Eligibility Verification, Form I-9 from the U.S. Citizenship and Immigration Services.

Ned and Marge will also want to plan for the coming year. In doing so, they will be best able to take advantage of tax credits and deductions.

Ned is in a tough situation, as he wants to donate his entire amount of pay to the church. He does not have many options in receiving credit for the donation past the fifty percent mark, and might want to consider other ways in which he could give back to the church. Perhaps Ned could invest in an organization such as Find Us Faithful, in which he can put aside money tax-free until he is able to disperse it at a later date. He could also consider purchasing stock and later donating it to the church. If he is willing to accept the loss from donating his full amount of babysitting income, Ned should have his total tax requirements determined and then set this amount aside to pay the government next April.