May a Parent Pay Your Helper Directly to Avoid Payroll Tax Issues?

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Hiring employees and dealing with the complication and expense of federal and state payroll taxes is a burden many family child care providers try to avoid.

One way they try to avoid this is by having one or more parents pay their helper directly.

At a recent family child care conference a provider told me that she has one parent pay her helper directly. The helper reports this as her income, the provider treats the helper as an independent contractor, and the parent claims the amount paid toward their child care tax credit.

Will this work? No.

The only way this could work is if the helper was running her own business out of the provider’s home. In other words, there needs to be two child care businesses operating independently from each other.

But, in reality this is practically impossible.

For there to be two businesses the helper would have to have her own license. Many states don’t allow two family child care businesses to operate out of one home. Food Program regulations won’t reimburse for two businesses out of the same home, so the helper would lose this income. The helper would need her own professional business liability insurance.

The two businesses would have to keep completely separate business records. The helper would need to own her own toys, food, supplies and equipment. As a separate business the helper should be paying rent to the provider. The provider would report this rent on a Schedule E and claim some house expenses on this form.

The helper would have to have her own contract with the parent and run her business independently from the provider’s business. The helper would have her own curriculum and conduct activities according to her rules, not the rules of the provider.

When providers talk to me about doing this, they usually aren’t following any of the requirements I’ve identified above.

A helper who is working directly with children is the employee of the provider. The only way a helper could be considered an independent contractor is if the helper is acting as a substitute and works for other providers as a substitute. Or, if the helper works for an employment agency and the provider pays the employment agency.

Therefore, the provider must follow all the payroll tax rules:

  • Federal: withhold and pay Social Security/Medicare taxes, withhold federal income taxes, pay federal unemployment taxes
  • State: pay state unemployment taxes, withhold state income taxes, purchase workers compensation insurance

There aren’t any short cuts. For details on hiring employees, see my article “Your Payroll Tax Responsibilities as an Employer.”

See also, “Are Helpers Your Employees or Independent Contractors?”

Tom Copeland – www.tomcopelandblog.com

Image credit: http://community-minded.org/family-resources/family-and-provider-information/types-of-child-care


Categories: Employees, Record Keeping & Taxes

2 replies

  1. I haven’t done this, but a parent wondered if they could hire a babysitter to come to take care of their children while I had an appointment. They would sign the children out as an authorized adult, but just stay at my house and then the babysitter signs them back in when I get back. Would this be legal?

  2. First, you’d need to check with your child care licensor to see if this is in violation of child care regulations. It likely would be because the babysitter would have to meet all the same standards as the provider. Second, if it is legal, you would still be liable for anything that happened to the child. Third, you would probably have to treat the babysitter as your employee, and the parent couldn’t pay her. The babysitter would be operating under your direction and control since she is in your home, using your equipment, following your rules and operating under your contract with the parent.