How should I handle taxes when I babysit?
May 3, 2009 4:29 PM   Subscribe

Baby-sitting employer wants to pay under-the-table, but also claim the Child Care Credit using my SSN as a care provider... isn't this asking for trouble?

I'm asking this on behalf of my girlfriend (Ms. DeucesHigh, in a few posts).

Last year, she worked as a babysitter for a local family, watching the kids full-time over the summer, and 10 hours a week during the school year. All-told, she made about $10k in 2008 from them. They never asked for her SSN, there was never any sort of discussion of taxes, and they were not withholding income tax or paying payroll taxes. Clearly it was understood that she was being paid under-the-table, which is the way they handle things with a few other individuals who also watch their kids. (Just to note, I'm not looking for opinions on whether this was a dumb idea, or whether she should have paid her taxes or not -- that can be taken to MetaTalk).

Anyway, this spring rolls around, and her father files her tax return as he usually does; she had a W-2 from a school job, but didn't get anything from her babysitting employers (W-2 or 1099) and he didn't factor in that income.

On the 10th of April, her employers e-mail and ask for her home address and her SSN, so that they could fill out a form to get the Child and Dependent Care Credit (35% of the money they spent on child care, up to $3000 for 1 child, or $6000 for 2 or more). We weren't really considering the ramifications (and she had no reasonable way to refuse, in any case), so she gave them the information.

She sent them a follow-up e-mail asking whether it was a good idea to list them as a childcare provider, since there was no corresponding income reported for her, or expense reported for them. Her employers said that they have done it before with no problems, but that they'd look into it and ask their accountant. Nothing more was said on the matter, and we assumed they did not include her on their return. Today, though, they sent another e-mail saying that they did go ahead and list her as a childcare provider, to get the tax credit... long after it was possible for her to file an amended return to try to preempt any problems.

The Household Employer's IRS Tax Guide references the Child and Dependent Care credit, and vice versa, so it wouldn't be inconceivable to think that the two are often filed together, and probably cross-referenced pretty routinely. It seems like a no-brainer that claiming a tax credit for childcare that is not otherwise substantiated by tax returns would raise red flags for an audit (for her, or for them, or both).

It's somewhat surprising that they didn't 1099 her to leave her unfairly holding the bag for all of the taxes, since that would keep them in the clear to get their tax refund, and most people wouldn't fight it. However, it is clear that their legal responsibility was to pay payroll taxes as a Household Employer (see below). They were required to furnish a W-2 Wage and Tax Statement by Feb 1, and to submit Schedule H to report the household employment taxes.

Given all of this information, what is her best course of action?

-Ignore the situation, and hope that no one gets audited?
-File an amended tax return as though she was self-employed, and get hit with the full self-employment taxes and possible penalties?
-File an amended return as an employee, and file Form 4852 to request a W-2? (she's legally an Employee, as noted below, but she doesn't want to do this, since that gets the IRS involved automatically to hunt for the unpaid payroll taxes, and would probably irk her employers)

Thanks for any input!


From the IRS article on the Dependent Care Credit:
"If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer. If you are a household employer, you may have to withhold and pay social security and Medicare tax and pay federal unemployment tax. For information, see Publication 926, Household Employer's Tax Guide."


According to the Household Employer's Tax Guide:

"Do You Have a Household Employee?

You have a household employee if you hired someone to do household work and that worker is your employee. The worker is your employee if you can control not only what work is done, but how it is done. If the worker is your employee, it does not matter whether the work is full time or part time or that you hired the worker through an agency or from a list provided by an agency or association. It also does not matter whether you pay the worker on an hourly, daily, or weekly basis, or by the job.

Example: You pay Betty Shore to babysit your child and do light housework 4 days a week in your home. Betty follows your specific instructions about household and child care duties. You provide the household equipment and supplies that Betty needs to do her work. Betty is your household employee.
Household work. Household work is work done in or around your home. Some examples of workers who do household work are: (...Babysitters...Nannies...etc etc)

IF you ...
A-- Pay cash wages of $1,600 or more in 2008 to any one household employee.

THEN you need to...
Withhold and pay social security and Medicare taxes.
-The taxes are 15.3% of cash wages.
-Your employee's share is 7.65% (You can choose to pay it yourself and not withhold it.)
-Your share is a matching 7.65%. "
posted by DeucesHigh to Work & Money (11 answers total) 3 users marked this as a favorite
Baby-sitting employer wants to pay under-the-table, but also claim the Child Care Credit using my SSN as a care provider... isn't this asking for trouble?

Seems like an ill-considered move to have their cake and report it too.
posted by zippy at 4:43 PM on May 3, 2009 [3 favorites]

Having had a household employee for childcare at one point and having had to go through the rigmarole of all this requires, I'd say that it is likely that nothing will happen, but there is always a chance. It is a crapshoot whether or not their particular returns will be selected for audit.

Maybe they assumed they could pay her as a contractor with a 1099 (which you could for practically any OTHER kind of contract work, but that is not the case with anyone doing childcare in your home. You MUST file as a household employer and file a "shedule H" with your federal taxes if you pay over a certain income threshold to anyone caring for your children in your home. This means they also should have paid her social security, medicare etc and given her a W2.

It's the nanny tax and a complete pain in the ass from the employer's side. The rules on this changed several years ago after some embarrassing incidents where our legislators that got caught with undocumented nannies and housekeepers. THANKS GUYS!!!
posted by Edubya at 4:46 PM on May 3, 2009

It is a foolish move on their part. All things considered, it's unlikely that anyone in government will play connect-the-dots over such a relatively paltry amount of money, but if either party gets audited for an unrelated issue over the next several years, there will be some very uncomfortable questions for both sides to answer.

Bottom line, it's a relatively low risk gamble. But it's also one that will really suck if you lose that gamble.
posted by barc0001 at 4:48 PM on May 3, 2009

If you hadn't discussed it over email, you would at least have some deniability. But the email record could be used to prove that your girlfriend knew that what she was doing was against the law.

On the other hand, if they do get caught they'll probably just have to pay a fine or something, hopefully the government won't bother with the girlfriend. You'll find out soon enough, I guess. It's not that much money so they probably won't care, but I really have no idea.
posted by delmoi at 5:22 PM on May 3, 2009

Even if the odds are slim, she does not want to get in trouble with the IRS. That kind of trouble never goes away, and racks up penalties. It's not a few hours of babysitting if it's $10,000. It's income, and two people made mistakes (they did not report it, and she did not report it). She needs to correct her end, and not worry about their end.

If I were her, I'd do one of the last two options you outlined:

- First: File an amended return as an employee, and file Form 4852 to request a W-2? (she's legally an Employee, as noted below, but she doesn't want to do this, since that gets the IRS involved automatically to hunt for the unpaid payroll taxes, and would probably irk her employers)

- Then if that doesn't work: File an amended tax return as though she was self-employed, and get hit with the full self-employment taxes and possible penalties?
posted by Houstonian at 5:34 PM on May 3, 2009

I would ask a tax expert for advice on how to proceed, but I wouldn't just leave it and hope for the best. When I was in graduate school, I reported about $4K of work-study earnings as scholarship income when the university reported it as contract employee income, and I was audited and threatened with penalties, even though my total income was somewhere around $10K. It was sorted out with a letter, fortunately, but the IRS will go after even small amounts.
posted by egret at 11:29 PM on May 3, 2009

I say re-file an amended form 4852. It is a case of balancing risks and rewards. Her employers are risking an audit and financial penalties for the reward of the tax credit to the tune of several thousand dollars. On the other hand, your girlfriend is rinking the same finacial penalities (as well as the stress of knowing an audit of all her past and future returns could come at any time) for no reward at all. Since they have done this for several years (and probaly will continue to do so) with multiple people the chances of attracking the attention of the IRS are higher that normal.

In her shoes, I would send an email stating that as they have filed using her SSN and wages she will be filing the amended 4852 with the expectation that they would be paying all the taxes as her rates would have been higher if she had expected the tax hit and they did not do the witholding at the time. This also entitles her to the social security when she is older. If she is nice, she could give them the option of having her file as self-employed if they pay the taxes. Give the employers a week to come up with the money and if they don't, file as employed and let them take the tax hit they brought on themselves. This really isn't her problem and she should not feel bad that they have brought this situation on themselves. It was very selfish of them to expect her to pay the penalties and taxes so they could claim the tax credit while also depriving her of the social security income.
posted by saucysault at 8:57 AM on May 4, 2009

Gah, sorry for all my typos, horrible head cold. Good luck to your girlfriend.
posted by saucysault at 9:25 AM on May 4, 2009

Response by poster: Yeah, we pretty much agree with most of the posts. I just can't imagine how they think this is a smart idea, especially if they do have an accountant (though the "our accountant told us to do it" line might just be a way of going ahead without taking the personal responsibility for trying to screw her). OTOH, they probably do have an accountant: both of them have home-offices, and they run their own business (again, begging for an audit...).

Personally, I'm strongly in favor of her filing an amended return and 4852, both to cover her, and to swat them for trying to have their cake and eat it too. Any idea how the IRS treats amended returns that aren't for minor changes... ones that basically imply "yeah, I didn't mention that I have a job - here's my real income"?

On the other hand, her position is that the family likes her a lot, and they just gave her a raise in the same e-mail that mentioned that they were taking the childcare credit. It would seem 'ungrateful' to go ahead and rat them out to the IRS (no matter how good the reason). She could find another similar job in a heartbeat, but she likes the kids, and the pay is good -- it's possible they'd drop her for someone who *doesn't* insist they pay the nanny tax, if she makes trouble about it.

Is there any way that she could go ahead and declare the income and pay the taxes she would have been responsible for, without taking the actual step of filing the Missing-W-2 form? A way that -- even if it's not entirely correct -- would at least make it look like she made a good-faith effort to pay her taxes, and would mitigate penalties? Can one simply declare 'income' and pay it at their marginal tax rate (is this how wait-staff handle tips?) without any corresponding W-2 or 1099, and without paying the payroll taxes associated with being self-employed? Sorry for all the questions -- clearly neither of us is an accountant!
posted by DeucesHigh at 5:53 AM on May 5, 2009

The IRS is pretty clear on what she needs to do.

I understand she feels like she's ratting them out, but really -- are they so great that they are worth an audit?

Consider your last paragraph. Essentially, you are brainstorming for ideas on how to compound the problem with lying to the IRS to cover for the employer. Really, does this make sense?

The possibility of an audit runs for 7 years from the date the tax return was filed. Seven years. Seven years from now, her employer will be a fading memory, but she could still take the fall for them.

If she wants to mitigate the damage to the relationship, I think she should talk to them first, but not change her course of action. That gives them time to do whatever they think is best. And in fact, it's Step 1 in the IRS sheet I linked to, above.
posted by Houstonian at 7:46 AM on May 5, 2009

Your girlfriend seems to be bending logic over backwards (to mix a metaphor) when she claims they are giving her a pay raise. Because they just gave her a big pay cut on last year's wages she didn't know about and if she declare this year's income as well (or gets audited in the next seven years) she will be holding on to that "pay raise" only to give it to the IRS for the taxes her employers are deliberately making her pay so they don't have to. Letting people walk all over you rarely turns out well. Funny how she doesn't want to rat them out but they have no problem whatsoever of making her face the financial penalties when $500 to her means at least a week of work and to them probably means a few hours work.
posted by saucysault at 6:01 PM on May 5, 2009

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