To Hire a Relative or Not?

A 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?

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.

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 $12,550 (2021 rules) 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.

For 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.

Tom Copeland, www.tomcopelandblog.com

Image credit: https://stocksnap.io/photo/grandmother-child-ZK25PFAY2G