My DW has been watching my brother's kids a few days a week lately, and it will end up being all summer. She is doing this so my brother's wife can go back to work. They pay her a little something (I'll stress little), but by the end of the year, I could see it being $1000-$1500). On the flip side, my DW drives the kids around to all their activities, and pays for lunches, pool fees, and some periodic fun things like the water park. We have no problem with the arrangement...it wasn't a "for profit deal" for us, but my brother would like to give us a 1099 for the income. No problem there either, but if he does, should my DW track all her expenses, so we can deduct all the mileage, fees, lunches, etc.? If not, we are really going negative on the deal, since the payment really only barely covers what we spend.

Any advice?

I would track them just to be on the safe side, but I'm not sure of the deductability. Because you are a)family and b)not running it as a business, im not sure you will be able to deduct these things. He's probably giving a 1099 so he can take a child care credit, but because you aren't running a daycare, it's more of a gift, especially since you are family.

He's probably giving a 1099 so he can take a child care credit, but because you aren't running a daycare, it's more of a gift, especially since you are family.

Its not a gift. A gift has to have absolutely no strings attached. This is definitely compensation. Yes, you should definitely track them as best you can, including mileage, keep receipts, etc.

I'm not sure exactly how you'd file this, but I'm pretty darn sure that you'd have to pay some sort of tax on it if you cant prove expenses.

My DW has been watching my brother's kids a few days a week lately, and it will end up being all summer. She is doing this so my brother's wife can go back to work. They pay her a little something (I'll stress little), but by the end of the year, I could see it being $1000-$1500). On the flip side, my DW drives the kids around to all their activities, and pays for lunches, pool fees, and some periodic fun things like the water park.

Question: When they're not out having fun, where does the watching go on--your house or your brother's? This matters because IMO it weighs heavily in determining whether your wife is self-employed or a domestic employee in your brother's home.

We have no problem with the arrangement...it wasn't a "for profit deal" for us, but my brother would like to give us a 1099 for the income.

This is inappropriate no matter what the answer to my question is. If your brother has a household employee, he reports those wages on a W-2 and Schedule H of the 1040. If your wife is self-employed, your brother need only show her SSN and other identifying information on Form 2441, where he claims the childcare credit. 1099's are for business expenses.

No problem there either, but if he does, should my DW track all her expenses, so we can deduct all the mileage, fees, lunches, etc.? If not, we are really going negative on the deal, since the payment really only barely covers what we spend.

Regardless of whether she's self-employed or an employee, your wife needs to keep a record of her expenses.

Phil

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.

--Peter

Without a doubt by issuing a 1099, (whether it should be a W-1 or not is immaterial), her BIL is going to take a tax deduction or credit for what he pays your wife. That's taxable income to you. IF he issues the 1099, your move is to file it on Schedule C as a business, not a hobby. A hobby is something the IRS forces on you when you lose money at a business, not something you voluntarily do if you sell something or perform a service. Since when is baby sitting a hobby?

Anyway your wife is in the child care business and can write off more than she makes by allocating portions of the home, plus outside travel expenses, etc. for starters get IRS Publication 587 (www.irs.gov) regarding providing child care. Instead of paying tax on it, REDUCE your taxes due to it. If you reduce your net to $433 or lower there's no SE taxes.

ed

Since when is baby sitting a hobby?
If she loses money baby sitting for more than three out of the past five years then the IRS considers it a hobby unless she is running it in a prudent businesslike manner. Especially in this case because the brother in law is attempting to turn non-deductable expenses of childcare (lunches, milage, fees) into a deduction.

Sometimes 1099's are used for compensation...the board of director's fees are generally reported on a 1099-MISC and just picked up on the individuals 1040 under other income (and is subject to employment taxes)

WRJ

If she loses money baby sitting for more than three out of the past five years then the IRS considers it a hobby unless she is running it in a prudent businesslike manner.

I think it's "if she makes money in 2 of the past 5 years the IRS CAN'T claim it's a hobby", or something similar. If expensed correctly, Daycare almost always loses money because its home use deductions are so much broader than regular home office deductions.

ed

No problem there either, but if he does, should my DW track all her expenses, so we can deduct all the mileage, fees, lunches, etc.? If not, we are really going negative on the deal, since the payment really only barely covers what we spend.

One thing you might consider is to simply have the brother pay his share of the activity expenses. I'm no where nearly as knowledgable as some of the other posters here, but this seems quite far removed from a typical "business income" or even "other income" situation. It sounds like what's really happening is that you're doing a favor for the brother. You're not making any money on this arrangement, and if it's treated as an income situation (e.g. brother paying DW $5/hour for daycare services), you'll be even more in the hole because you'll now have to pay taxes on that "income."

Here's what I'd do: (1) tell the brother that you won't accept compensation for your time & services, but (2) you expect him to pay his fair share of the direct costs of taking care of the kids (food, auto expenses, entry fees, etc.). I think this is a much better representation of what's really happening here. It also eliminates tax complications. I see this situation as being similar to when friends eat out together, one of them pays with a CC, and the rest of them each chip in their share of the bill. Or, when a few friends go on a road trip, and chip in for car expenses. Ultimately, what you'd like to happen in your situation to keep things simple is for the kids to pay for their own expenses. 'course, this is unrealistic, so their parents should pay for those expenses. Due to the fact that the parents aren't physically with the kids when the payment for expenses happen, DW pays. But, that doesn't mean that you need to get the IRS involved. Just have the brother give you a "slush fund" of monies that are to be used for the kids' expenses, or something like that.

My 2c,

Puss

Without a doubt by issuing a 1099, her BIL is going to take a tax deduction or credit for what he pays your wife.

Agreed. The BIL's motivation is almost certainly to take the child care credit.

(whether it should be a [W-2] or not is immaterial)

I disagree. It makes a tremendous difference to the OP.

If it should be a W-2, the OP would be an employee. FICA taxes would be due on the gross pay, and the expenses she incurs may not provide a tax benefit.

If she's not an employee, the FICA taxes are going to be less. At a minimum, the expenses will reduce the FICA taxable income. And if it's a hobby, no FICA taxes are due at all.

That's taxable income to you.

Again we agree. The income is taxable.

IF he issues the 1099, your move is to file it on Schedule C as a business, not a hobby. A hobby is something the IRS forces on you when you lose money at a business, not something you voluntarily do if you sell something or perform a service. Since when is baby sitting a hobby?

Back to disagreement.

A trade or business is an activity in which you expect to make a profit. You might not actually do so, but you carry on the activity with a genuine expectation of making a profit. A hobby is an activity that is entered into without an expectation of profit.

Hobby and business are two mutually exclusive things. An activity is a business, or it is a hobby. (At least for tax purposes.) If you lose money at a business, you claim your losses. If you lose money at a hobby, it's not deductible.

And it can make sense to claim an activity is a hobby, as it removes FICA taxation from the picture. FICA taxes are due only on the net income from a trade or business, not on hobby income.

Anyway your wife is in the child care business and can write off more than she makes

I'm going to disagree again.

It sounds like there is no expectation of a profit. The OP isn't looking for more kids to care for, isn't seeking the necessary licenses for a business or a day care center, and isn't expecting the payments from the children she is caring for to cover her expenses. That screams "hobby" to me.

--Peter

Better than just tracking the expenses, bill for them. Let yourbrother see the bottom line andtell himm to stop the nonsense with the 1099.

If it should be a W-2, the OP would be an employee. FICA taxes would be due on the gross pay, and the expenses she incurs may not provide a tax benefit.

If she's not an employee, the FICA taxes are going to be less. At a minimum, the expenses will reduce the FICA taxable income. And if it's a hobby, no FICA taxes are due at all.


Perhaps I am not remembering correctly, but it would seem to me that FICA taxes would be much more if she's not an employee. If she's an employee, then she pays half the FICA, and the employer, the BIL in this case, pays the other half of FICA. But if she's self-employed, she pays both the employee and employer portion. It seems to me that it's something like 7.5% for each half, so it's that extra 7.5% she'd be paying if she's self-employed. I can't imagine the business expenses she may incur would be higher than that, but you never know.

Do I have it backwards?

Do I have it backwards?

No. You've got it right.

But if she's an employee, the FICA tax is due on the gross wages, before expenses.

If she's self-employed (and I don't think she is), the FICA taxes are due on the NET income from self employment. And we're talking about expenses that would reduce the net income to something close to zero. So there would be virtually no FICA taxes due.

--Peter

Wow...thanks everyone. My brother isn't an accountant, but he uses one. I think he just used the term 1099 generically. I think you are right, he plans on issuing a W-2. So really it would make sense for him to "reimburse her" for her raw costs...and anything about that (if there is any) would be on the W-2. I'm sure he is looking for the child care credit, but I definitely don't want to pay taxes on the raw costs. I'll take all this info...and figure out what to do!

You all are awesome!

Question: When they're not out having fun, where does the watching go on--your house or your brother's? This matters because IMO it weighs heavily in determining whether your wife is self-employed or a domestic employee in your brother's home.

The watching goes on at my brother's house.


This is inappropriate no matter what the answer to my question is. If your brother has a household employee, he reports those wages on a W-2 and Schedule H of the 1040. If your wife is self-employed, your brother need only show her SSN and other identifying information on Form 2441, where he claims the childcare credit. 1099's are for business expenses.

I'm sure that is what he plans to do. I think he must have just gotten the two forms flipped.



Regardless of whether she's self-employed or an employee, your wife needs to keep a record of her expenses.

Ok. I'll have her keep reciepts, and track mileage. She doesn't want the headache, since it really isn't a job, but I don't want to pay senseless taxes either!

1099's are for business expenses.

Aren't you also supposed to write out a 1099 when you personally pay a contractor, or you personally forgive someone a loan?

Aren't you also supposed to write out a 1099 when you personally pay a contractor, or you personally forgive someone a loan?

No. The reporting requirements are in the instructions for the 1099 series.

Phil