At first glance these seems like simple transactions between a family child care provide and parent:
- A parent offers to paint your house, repair your car or install a new deck in exchange for discounted or free child care services
- You offer to give the parent discounted or free child care services in exchange for the parent helping you care for the children
Not so fast.
Whenever you exchange services with parents it’s considered bartering and there are tax consequences that quickly complicate these arrangements.
General bartering rules
You must treat a bartering arrangement as if money exchanged hands. So, let’s say a parent painted you house in exchange for you giving the parent two free weeks of child care. If the normal fee for two weeks of care is $300, you would have to report $300 as income because that’s what they would have paid you under normal conditions. You could deduct the Time-Space % of the cost of painting the house as a business expense. If you determined that the painting was worth $500 and your Time-Space % was 30%, you could deduct $150.
The parent could claim $300 towards their child care tax credit and would have to report $500 as income.
See my article, “Is Bartering a Good Idea?”
Bartering for child care help
It gets more complicated if you barter with a parent to get their help in caring for children.
Let’s say the parent works for you for 40 hours a week for four weeks without pay, and you offer free care for her child for that time. Let’s say you would normally pay a helper $8 and hour and your weekly rate for the parent’s child is $200.
Parent responsibility: The parent would have to report $1,280 as income ($8 an hour x 40 hours x 4 weeks). The parent could also claim $800 ($200 weekly fee x 4) towards their child care tax credit because that’s how much they would have paid if cash had exchanged hands.
Provider responsibility: The provider must report $800 as income and can deduct $1,280 as a business expense. Since the parent is helping the provider care for children, the provider must treat the parent as an employee. This means the provider must pay the employer and employee share of Social Security/Medicare tax on behalf of the parent. This tax is 15.3% of wages or $195.84. The provider must pay this using the quarterly IRS Form 942. The provider does not have to pay federal unemployment tax because the parent was not paid more than $1,500 in any three months, nor did the parent work twenty or more weeks in the year. In addition, the provider does not have to withhold state and federal income taxes. Check with your state department of labor to see if you have to pay state unemployment tax or purchase workers compensation insurance.
If you are going to have a parent work for you, check with your licensor to learn what background checks or training this person must have.
Put your bartering agreement with the parent in writing.
In the above example you could charge the parent the difference between your regular rate $200 a week and the amount of wages the parent was receiving. Since your rate is $200 a week and the parent is earning $320 per week ($8 an hour x 40 hours), you could require the parent to pay you $120 in cash each week. If you did so, you would also report the $120 as income and the parent could report the $120 towards their child care tax credit.
If you do barter, try not to barter for something that you can’t deduct on your taxes. For example, if the parent fixes your car in exchange for free child care, you won’t be able to deduct any of the cost of the car repair unless you use the actual expenses method for claiming car expenses. If the parent fixes your motorcycle, you won’t be able to deduct anything.
If you agree to barter with one family you are not required to barter with other families.
Because their is no real tax benefit to bartering, it only makes sense if the parent can’t afford to pay you in cash.
Tom Copeland – www.tomcopelandblog.com