To Hire a Relative or Not?

6a0133f3fc5805970b014e862fb16a970d-320wiA family child care provider wants her mother/sister/older child to help her care for the children in her program. Maybe it’s just for the summer or for a few hours a week throughout the year.

Should the child care provider hire her relative as an employee or not?

Although this is a complicated situation, my simple answer is to not hire a relative as an employee (with a limited exception). Instead, give money to the relative as a gift and don’t treat it as a business transaction.

As a general rule, if you hire someone to help you care for the children in your care you must treat this person as your employee, not as an independent contractor. This involves a number of federal and state payroll tax and insurance issues.

On the federal level you must withhold Social Security/Medicare taxes, withhold federal income taxes, pay annual federal unemployment taxes, and file a series of quarterly and annual payroll tax forms.

On the state level you must withhold state income taxes (unless your state doesn’t have income taxes), pay state unemployment taxes, and purchase workers compensation insurance. Since state laws vary widely in this area, check with your state department of revenue and workers compensation office to find out your responsibilities.

Holy cow! What a pain in the neck. Many child care providers fail to follow these rules and put themselves at risk for an IRS or state tax audit and for paying thousands of dollars in medical bills and penalties for not having workers compensation insurance.

You must treat such workers as employees regardless of how little you pay them or how few hours they work. There is no rule that says you can pay someone less than $600 a year and treat them as an independent contractor.

Exception

The only exception to this rule is if the person doing the work is operating as a self-employed business providing substitute care. Such a person would need to have a business name registered with the state, have a business identification number, work for a number of different child care providers, and use their own contract. Also, if a person comes into your program to conduct an activity (music lesson, puppet show, etc.) this person would be considered an independent contractor, not an employee.

If you do follow all the rules and hire an employee you can deduct the cost of the wages and all federal and state taxes and insurance as a business expense. The relative must report her wages as taxable income.

A Better Way

Rather than hire your relative, tell them that you won’t pay them for the work they do for you. Instead, give them a gift of cash or clothing as a loving daughter, sibling, or mother. You aren’t paying them for their work. You are giving them a gift. When you do this you can’t deduct the gift as a business expense and the relative doesn’t have to report the gift as taxable income. You aren’t breaking any IRS rules if you do this. It’s all on the up and up. I’ve spoken directly with an IRS officer about this and she reassures me that the IRS would not try to turn this into an employer-employee situation.

The only time I would suggest you consider hiring a relative is if this person is working for you on a full-time basis or on a regular part-time basis throughout the year. Unless this person doesn’t mind working for no pay and receiving occasional gifts from you, I think the longer hours makes it more likely you should treat this as a business relationship.

Note: After talking with another IRS official (!), I’ve learned that it’s not a good idea to exchange work for gifts as I described above. If you do this, the IRS is likely to conclude that this was payment for your work and treat this as an employer/employee relationship.

Hiring Your Own Children

One note about hiring your own children: If you hire your own child who is age 18 or older you still must withhold and pay Social Security/Medicare taxes and withhold federal and state income taxes. But you won’t owe federal unemployment taxes. Contact your state for your state rules. As a result, I believe it makes more sense to give this child gifts, unless you want your child to learn what it’s like to be an employee.

If your own child is under age 18 there is no Social Security/Medicare taxes, no state or federal tax withholding and your child care earn up to $5,700 and not owe any federal income taxes. Therefore, there is a tax benefit to your family in that you can deduct the wages you pay and the child probably won’t have to pay any taxes. As a result, you may want to treat your younger children as employees.

This is the first of a series of articles on hiring workers for your business.

See also: “Are Helpers Your Employees or Independent Contractors”, “What is an Independent Contractor”, “Your Payroll Responsibilities as an Employer”, “Do You Need Workers’ Compensation Insurance?” and “When Hiring Your Husband Makes Sense.”

So – maybe it’s time to talk to your relatives about how they would feel about getting gifts from you.

Image credit: speedysigns.com

2014 TW smallFor further information about how to file all the federal payroll tax forms if you do decide to hire employees, see my Family Child Care Tax Workbook and Organizer.

 

 

 

Copyright 2011, Tom Copeland, www.tomcopelandblog.com



Categories: Employees, Record Keeping & Taxes

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21 replies

  1. Hi Tom, My husband has been out of work for two years, and has been helping me (under deress!) with the day care. From this article I gather I should not pay him(or not have paid him in 2010)so he shows no income, and I do not have any expense for him working with me. My next question, my 22 yo. daughter is coming to work for me this summer (she is 4th year teaching degree) She will probably work full time with me, but I should not pay her to work, and she can not claim any monies that I “gift” to her. Is that correct? What if her college freind also works for me. Can she be a “volunteer” and I “gift” to her through out the summer also, as long as she does not claim it on her taxes??
    Thanks,
    Joan

  2. If you hire your husband there is little, if any financial benefit for doing so because he has to report the money he would earn as income. Yes, if you don’t pay your daughter, but instead give her gifts this is not income to her and is not deductible to you. Trying to do this with a non family member won’t work. You must treat her college friend as an employee.

  3. Yes its very true that don’t hire any of the Relative as a Employee.But you can Hire your Friend as en employee and you can give them Salary.Its Batter than the Family Members or the Relatives.

  4. My niece who is 18 is going to be staying with me for 6 months and wants to help with Daycare. She isnt going to be paying rent, can I gift her spending money while she stays with us? Or do I have to pay her? Which is the better option?

  5. If you pay her you will have to treat her as an employee (withhold social security tax, pay state and federal unemployment tax, withhold state and federal income taxes, and perhaps pay workers’ compensation insurance). If you do all this, then you can deduct what you pay her and the taxes as a business deduction. She would have to report her wages as income.
    Instead, I would recommend not paying her at all. You can give her some spending money as a gift. She would not have to report this as income and you would not be able to deduct it as a business expense.

  6. i live in NY i am a group child care provider i 2 9yr olds i pay an allowance to for chores what i was wondering if they could do some task above and beyond for child care business and get pay not being 14yrs old with working papers not sure i did call board of labor seem to be confusion being there r many exclusions like child golf caddies, actor, newspaper delivers farm help etc. i thought this would be the next best place to come for information thank you for ur time

  7. Federal law allows you to have your 9 year old children work for your business. NY state law says you can’t hire your own child under age 12 to work for your business. For more information: http://www.labor.ny.gov/workerprotection/laborstandards/workprot/wphmpg.shtm. See the section on Types of Working Papers

  8. k have another ? my basement we r turning half of it int to daycare supplies only but to do that we have to water proof the basement and in doing so the water proofing will be along in the area of the basement where we r walling it off ( building walls) to use only for daycare storage now can i write off the thousands it is going to cost to water proof this area so supplies don’t get damaged business 100% or something else thank you

  9. If the basement area that is going to be waterproofed is only used for your business, you can deduct 100% of the cost. If the area is also being used for personal purposes, deduct the time-space percentage of the cost.

  10. my husbands family won the lottery! It puts us into a higher tax bracket for this year. My question is my tax preparer told us to hire our 18yr old daughter.Not sure what to do.I know we need the deduction, but really sounds like its compicated. How do i find the paper work and do I, hold out the taxes? What do you think

  11. Hiring an 18 year old means withholding Social Security taxes, and withholding federal income taxes. Depending on your state laws, it may also mean paying state unemployment taxes and purchasing workers compensation insurance. Your daughter cannot do common household chores but must do work that is directly related to your business. See my articles about hiring family members in the Record Keeping section of the Index.

  12. Absolutely right.if you hire someone to help you care for the children in your care you must treat this person as your employee, not as an independent contractor.

  13. If my mom comes in as my substitute caregiver 10 – 11 hours a week, and I want to “gift” her with cash, can you tell me how often I’m allowed to give her this gift? Can it be monthly, bimonthly?

  14. There is no limit as to how much you can “gift” your mother.

  15. I have a friend, that hired her daughter to help her in her home daycare, she pays her less than minimum wage plus the spot for her granddaughter in the daycare. The daughter told her, “She could go to jail and have problems with the IRS if she doesn’t pay her minimum wage.” Is this true? Once you take her pay for the week plus the child care fee it is over minimum wage.

  16. You don’t have to pay your son or daughter the federal minimum wage. There may be a state law that says you have to pay state minimum wage for family members. And yes, the free care would be included in the compensation.

  17. I am looking into having a 2nd adult caregiver full time 9-5 mon-fri., just for a 2 month time May 16th to June 20th (while I have some new kids starting, and before the school year kids leave) She is not a relative, but a friend of our family from church. Can I pay her as a gift being she is not a relative? would it be acceptable to draw up a contract with her stating that she is not an employee and would be paid as a gift? And that there is no set term of time and will be as needed basis?

  18. No. Since she is not a relative, exchanging work for gifts would be seen by the IRS as bartering and you would have to pay all the same payroll taxes as an employer. So, you must treat this person as an employee. Putting in a contract that she is an independent contractor will not work.

  19. This is very helpful- My sister in law moved in with us and is going to do daycare with me- is she considered a relative and could I gift her here and there even if I need her to support my C3 license??

  20. Yes, you could treat this as a personal relationship and give her gifts.

  21. I have hired a 17 yr old. for the summer. I know you mention about hiring our own chldren and not paying taxes, social security and medicare, but what about an empolyee under the age of 18 but not a family member. My payroll is taking out social security and medicare. I am in Texas.

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