A number of years ago I asked an IRS official a question, “If a family child care provider’s mother or sister volunteered to work for her and the provider rewarded her with gifts, could the provider avoid the tax consequences of hiring an employee?”
The IRS official said that because of the close family relationship it is reasonable to consider this a personal transaction, not a business one.
I’ve been sharing this information at my workshops around the country.
However, I was not totally comfortable with giving this advice and I asked the same question of another IRS official last week.
She said that the IRS would consider this an employer/employee relationship. And after some discussion, I believe this is the correct advice.
An exchange of work for gifts is a form of bartering and should be treated as if money changed hands. This means the provider should be withholding Social Security tax and paying any federal and state unemployment tax in these situations. In addition, it’s likely that the provider must purchase workers’ compensation insurance.
To avoid all of this, providers can have their mother, sister or other relative volunteer to help them care for children, but they should not give an compensation in the form of cash or gifts to the relative. If you have been doing this, stop doing it now.
I apologize for not getting this right the first time.
Here’s the original article I wrote about this: “To Hire a Relative or Not?”
Tom Copeland – http://www.tomcopelandblog.com