IRS Gives Relief to Child Care Providers with Assistants

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Update: IRS has announced new relaxed rules.

Probably the biggest mistake family child care providers make is not following tax rules when hiring someone to help them in their business.

As I have written elsewhere (here and here), child care providers must treat such assistants as their employees, not as independent contractors. This means that if you hire someone to watch your daycare children, you must withhold and pay Social Security taxes, regardless of how little you pay the person!

In some states you will also owe state unemployment taxes and must purchase workers compensation insurance. If you hire someone on a regular basis, you will have to pay federal unemployment taxes as well.

Yet, some tax preparers advise child care providers to treat assistants as “independent contractors” and file Form 1099 Miscellaneous Income. Others say you don’t have to treat assistants as employees if you pay them less than $600 in a year.

Don’t listen to this bad advice! If you are audited by the IRS, they will not accept your claim that your assistant is an independent contractor. They will force you to pay back payroll taxes, interest, and penalties. This can add up to a lot of money.

Now for the good news!

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Categories: Employees, Record Keeping & Taxes

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17 replies

  1. Thanks for this fantastic information Tom! It makes me crazy to hear from at least one provider in almost every one of my workshops that their accountant has told them it’s OK to pay their assistant as an independent contractor. This is great news, and I hope providers will take advantage of this opportunity.
    I have a request though… Family child care providers are small business owners deserving respect and recognition of the value of their profession. I believe we need to give their employees the same respect and stop calling them “helpers”. We have made great strides in our fight to professionalize family child care and I think referring to them as assistants or employees will help promote that business image. As the number one expert on FCC business issues, I believe you can have a huge influence in making this happen.
    Thanks, Natalie

  2. Thanks for the feedback. I’ve changed the word “helpers” to “assistants.”

  3. So this would also be applicable to a substitute or emergency caregiver who works very seldom?

  4. Yes, it does. The only situations where a provider would have an independent contractor is if the person hired is in the business of providing substitute care – “Sally’s Substitute Service” or if the person is providing an activity (music lesson, etc.) as is not caring for children.

  5. I noticed the announcement of this program and thank you for this article, Tom. I think child care clients will asking these questions: What are the chances the IRS will reject my applications? What are the consequences, if that happens? Any idea what I should say to them? I always insist that new clients set up payroll going forward, but most choose to leave the past alone and hope for the best. Paying back taxes for pennies on the dollar will be very appealing, but not if the IRS might reject their application and come after them for full payment.
    Note to Natalie: Hearing that other tax pros tell clients it’s okay to file a 1099-MISC makes me crazy, too.

  6. Excellent question. I doubt that the IRS would reject a provider’s application because the amounts of money would be so small (few employees), but I don’t know this for a fact. Will the IRS reject an application and then go after the person? I don’t think so. If they did, this would get out and nobody would apply in the future.

  7. Tom, so can we hire an assistant under contract if we are having them work as someone coming in and preparing activities for the children and helping get lunch ready?
    What if someone goes on bed rest, and they need the person for 6 monhths?
    Thanks!

  8. The distinction between an employee and an independent contractor is complicated. In general, someone coming to her home and doing an activity (music lesson) is an independent contractor. However, if they are coming in every day and if they are getting lunch ready, then it starts to look like this person is an employee. Clearly, someone who is caring for children for you for 6 months (or even one week) would be considered an employee. An employee is someone over whom you have the right to direct and control their work. See my annual Family Child Care Tax Workbook and Organizer for more details on this distinction.

  9. I very seldom use anyone as a substitute but will be on the 24th. What do I need to do to do this legally? Can i write her a check from my business checkbook as long as i figure out where/when to pay the taxes on the income/expense?

  10. It doesn’t matter what account you pay your substitute employee out of.

  11. What are the laws on a relative substituting for you? (husband, mother, or cousin etc) Do you have to pay them if they do not wish to be paid?

  12. If you pay your relatives, you will have to treat them as employees and pay payroll taxes (Social Security, federal unemployment tax, and maybe state unemployment). Plus file a bunch of forms. It’s better not to pay them.

  13. Thanks. I wasn’t sure if it was legal to not pay them. My cousin is one of my trained subs & neither of us want to deal with the hassle of making her an employee but didn’t know if I was allowed to not pay her.

  14. You don’t have to pay your cousin.

  15. IF you have a person that wants to work for you and they have a business name like Lisa’s Substitute Service? This would be legit.. So if a friend of mine wants to work for me she could do this and I would be legit as the provider? Also if we did it this way do I get to claim the money I pay her on my taxes? In this scenario I would not have to pay taxes, social services, or workmans compensation?

  16. Just having a business name is not enough for someone who is caring for children for you to be considered an independent contractor. They would have to be working for other providers, register their name with the state, have their own tax id#, and be in the business of providing substitute care. Whether you had an independent contractor or an employee, you can deduct what you pay the person as a business expense. More more info, see the series of articles I’ve written on this: http://www.tomcopelandblog.com/employees.html

  17. Hi Tom…
    Thanks for this awesome article.
    I just wanted to know if I have a person that does not have a place to operate her daycare(she had one 3 years ago, but then left to PR, and now she lives with her daughter)… I currently have my license running, but want to focus on transportation; can she work at my house? Do she have to be my employee. Please help, where can I get help/information. My accountant told me I just need the 1099 :/

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