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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120807  
Subject: Re: Self employment tax Date: 6/22/2006 7:51 PM
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I'll agree with Phil.

A 1099 is inappropriate in this situation. A W-2 might be if the child care is happening in the children's house and not yours.

If the W-2 is appropriate, your wife's expenses would be employee business expenses and initially reported on Form 2106. This might not result in any real tax benefit, as they flow to schedule A as miscellaneous itemized deductions subject to the 2% of AGI floor. If you are not already over the 2% hurdle with other expenses, this probably won't provide any benefit.

On the other hand, if the care happens in your house, we've got more issues. You're not really self-employed, as you aren't doing this to make a profit. Wearing my tax auditor glasses, I'd say it was a hobby activity. The income is misc income and the expenses are itemized deductions (again subject to the 2% floor) and limited to the income from the activity. No social security taxes would be owed on the income.

A more aggressive position would be to report the income and expenses on schedule C. There, the expenses would directly offset the income, and potentially create a loss.

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