May a Parent Pay Your Helper Directly to Avoid Payroll Tax Issues?
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.
Tom Copeland - www.tomcopelandblog.com
Image credit: https://www.bbchildcareri.org/about/
