retired babysitters

[Possi]

I will have a situation coming up next year regarding my client whose retired parents will be babysitting for her children. She will claim her expense to get the tax credit. This will be mostly for the summer, as the kids are in school most of the day during the school year.

They are retired and really are not self employed. Will this go in as "other income" and not sch c subject to self employment tax?

Just looking ahead...
thanks!

[ChEAr$]

Key question:

I will have a situation coming up next year regarding my client whose retired parents will be babysitting for her children. She will claim her expense to get the tax credit. This will be mostly for the summer, as the kids are in school most of the day during the school year.

They are retired and really are not self employed. Will this go in as "other income" and not sch c subject to self employment tax?

Just looking ahead...
thanks!

Where will the services be performed? clients' house or parents' house?

[Possi]

both

Probably a little of both.

[erchess]

My Twi Cebts

There is clearly no problem with ahe parent paying the grandparents for child care and deducting the amount paid, subject to the normal rules. However,OP wants the grandparents to report the money on line 21 or F1040, presumably as hobby income. See TTB 5-19 and on for why this might be acceptable and how to report the allowable expenses. My own thought would be that if the grandparents do not do things in a businesslike way such as have a separate checking account and keep close tabs on their expenses they can do this. It would also help if the grandparents had expenses that eat up all the profit so that if there were a Sch C they would be losing money.

However, I have to ask myself why the family wants to do things in this way. The parent will save around 20 cents on the dollar in taxes and the grandparents will pay some additional tax because the expenses they can claim will be limited to income and then that amount will be reduced or eliminated by the 2% of AGi hump. It is not unheard of for grandparents to look after their grandchildren for free. It is not unheard of for parents to give gifts to their parents. Would it really run afoul of the form vs substance rules if the grandparents provided free child care and the mother remembered her parents on birthdays and anniversaries with cash gifts cumulatively equal to the day care exclusion minus 20%? Mother would come out the same and grandparents would come out better.

[TaxLadyinPA]

Neat question

That is an amazing question - I never thought about a grandparent saying the income was a hobby. They claim it as hobby income on line 21 and most grandparents would still end up with zero taxable income. I've had a couple in the past and made them pay self-employment tax after taking all the deductions that we could take.

However … what happens at their state and local level if it is hobby income .

In PA the total income would be subject to state tax without allowing any deductions. But then the grandparents probably would qualify for PA special forgiveness so maybe it wouldn't matter.

But then what about the local level of a PA resident. Is hobby income considered "Earned" Income subjecting them to the Local School District Income taxes, if yes then again they would not have any deductions against this income. They would be subject to 1 - 2 % tax (depending on the school district they lived in) on the total income received.

Now taking what Erchess says …. I never thought about the gifting factor. Great idea. Most Grandparents don't babysit for the money anyhow. They just enjoy the opportunity to see the grandchild and they are glad to help out mom and dad because they know then that the child is safe and not in the hands of some "weirdo" babysitter. (We hear horror stories all the time) So the parents give the grandparent a gift taking their deduction amount into consideration.

I will watch this message thread with interest to see the answers to the legality of being allowed to claim it as hobby income instead of self-employment.

*Thought for the Day* Don't you think that there should come a time in life after retirement age that the elderly should be allowed to have their little side line *hobby* jobs (no matter what it is i.e. woodworking shop or babysitting) and NOT be subject to self-employment tax. Get that law passed *LOL*

[Gene V]

From a previous post on Hobby

http://www.thetaxbook.com/forums/showthread.php?t=6517&highlight=hobby

Bees Knees


-------------------------------------------------------------------------------

A hobby for tax purposes is not always the same as what a taxpayer might call a hobby. A hobby for tax purposes is an activity that rarely shows a profit. A person who makes money on the side doing a hobby in his workshop is in fact operating a trade or business if he regularly shows a profit.

TTB, page 5-23 says:

Hobby income. Not subject to SE tax. Report income on line 21,
Form 1040, and deductions as miscellaneous itemized deductions,
subject to 2% AGI limitation. See page 5-19 for information
on hobbies. Note: An activity that shows a profit in three out of
five years is presumed to be a trade or business subject to SE tax,
even if it is in reality a hobby.

Court Case: The courts have ruled that an activity subject to SE tax must
be regular and continuous. A taxpayer was not liable for SE tax for doing
a one-time window installation job where he had never performed
that kind of service before, nor did he ever again at any time thereafter.
(Batok, Tax Court Memo, Dec. 28, 1992)

[fliszt]

I have

a client 66 yrs old that watches her grandchildren 12 months/yr. She is PAID by her daughter who takes the 2441 deduction which is $12,000/yr. The daughter records her mother's s/s# and consequently I report all of her income on schedule C. The only expense grandma has is mileage to and from daughters house. Grandma pay s/s tax.
But Possi, you sure made me think for a minute as I never thought of that either!!
Thanks for posting the question.
Larry

[erchess]

I believe that

if care is provided in the home of the child rather than the home of the care provider, the provider should be a household employee with all of the tax consequences for both sides of an employer employee relationship. I do not know about the 2441 in such a case.

[Burke]

The only expense grandma has is mileage to and from daughters house. Larry

Just a thought, but I believe that would be non-deductible commuting expense

[Zee]

That is an amazing question - I never thought about a grandparent saying the income was a hobby. They claim it as hobby income on line 21 and most grandparents would still end up with zero taxable income. I've had a couple in the past and made them pay self-employment tax after taking all the deductions that we could take.

However … what happens at their state and local level if it is hobby income .

In PA the total income would be subject to state tax without allowing any deductions. But then the grandparents probably would qualify for PA special forgiveness so maybe it wouldn't matter.

But then what about the local level of a PA resident. Is hobby income considered "Earned" Income subjecting them to the Local School District Income taxes, if yes then again they would not have any deductions against this income. They would be subject to 1 - 2 % tax (depending on the school district they lived in) on the total income received.

Now taking what Erchess says …. I never thought about the gifting factor. Great idea. Most Grandparents don't babysit for the money anyhow. They just enjoy the opportunity to see the grandchild and they are glad to help out mom and dad because they know then that the child is safe and not in the hands of some "weirdo" babysitter. (We hear horror stories all the time) So the parents give the grandparent a gift taking their deduction amount into consideration.

I will watch this message thread with interest to see the answers to the legality of being allowed to claim it as hobby income instead of self-employment.

*Thought for the Day* Don't you think that there should come a time in life after retirement age that the elderly should be allowed to have their little side line *hobby* jobs (no matter what it is i.e. woodworking shop or babysitting) and NOT be subject to self-employment tax. Get that law passed *LOL*

I sure don't agree with the "gifting" idea (unless I'm missing something). What you're suggesting isn't a gift, it's an agreement to provide babysitting services in return for renumeration in the form of gifts.

The hobby income idea also has problems. It's doubtful the expenses will equal the income, but I suppose it's possible.

[TaxLadyinPA]

I agree to disagree with your disagreement

I sure don't agree with the "gifting" idea (unless I'm missing something). What you're suggesting isn't a gift, it's an agreement to provide babysitting services in return for renumeration in the form of gifts.

The hobby income idea also has problems. It's doubtful the expenses will equal the income, but I suppose it's possible.

In a way, you are missing something … You are taking it literal to the letter of the law of taxes which we all know anything you receive is taxable when it is for services rendered.

I thought Erchess made an interesting suggestion about giving gifts.

Grandma and Grandpa could babysit for free. They love their grandkids and are grateful for the opportunity to spend time with them. They give the parents the gift of free baby sitting service. The parents are sooooo grateful to Mom and Dad (Grandma and Grandpa) for babysitting that they want to show their appreciation by giving them extra special monetary presents for their birthday, Christmas, etc.

So yes … literally …maybe it isn't a gift and it should be taxable …. But stretching the law {We would never really stretch the law and try to outsmart the government LOL} …..but giving presents because I love you and want to thank you for free babysitting is not taxable income. It's a win-win for everyone. Grandparents get the grandkids and some spending money on the side. Parents only give gift value up to the point that they would save themselves on taxes.

If you ask the IRS you can bet they would say the gift is payment for services rendered … (But I'm not going to ask them) ahahah

I think this is an interesting thread that really makes us think outside the box and find a creative way that is beneficial to all parties.

And yes the hobby income has problems with expenses. Most Grandparents wouldn't be able to deduct anything against hobby income because they most likely couldn't itemize deductions.

And I agree with Burke on NO DEDUCTION for mileage. It would be considered a commute. Something else the IRS took away when they realized that soooo many people who were getting 1099-misc that should be employees instead and if they were employee they couldn't deduct the mileage so in this instance of going to the house to babysit I agree their mileage would be a commute.

[Zee]

No, Tax Lady I'm not missing anything.

I would never advise a client to engage in an activity that is clearly tax avoidance and does not conform to tax laws. That's much different than good tax planning. And, it isn't thinking outside of the box. In my opinion, the situation described clearly violates Circular 230 and would be subject to a significant preparer penalty.

We, as tax professionals, should do the best we can to help clients pay the lowest tax possible in conformity with the current tax laws. There's nothing wrong with looking at suggestions like "gifting", and trying to find a method to lower taxes but recommending a position not in conformity with law isn't worth losing my license over.

I guess we just "think differently"

[S T]

Another viewpoint

As a grandmother, I offered childcare for my 1st grandson at the age of 8 weeks to approx 2 years old. . I did not charge my son and daughter-inlaw child care fees and willingly doted on my "new" and "first" grandson.

My son and daughter - in law were not entitled to claim child care deductions on their tax return, I claimed no income. There were no money transfers

And, any gifts that my son and daughter-inlaw gave us were gifts. An occasional dinner out, something extra on birthdays, xmas and whatever recognized grandparents day, etc.

Have to think that if the parents want the child care deduction, then the grandparents need to claim it as income. Maybe the parents need to go check out preschool and Montesorri to see how expensive child care really is, and then forego the Grandparent interaction so they can claim the deduction on form 2441.

Sandy

[TaxLadyinPA]

No, Tax Lady I'm not missing anything.

I would never advise a client to engage in an activity that is clearly tax avoidance and does not conform to tax laws. That's much different than good tax planning. In my opinion, the situation described clearly violates Circular 230 and would be subject to a significant preparer penalty.

Just for the Record .... As a 20 year tax preparer I too would never advise a client to engage in an activity that is clearly tax avoidance. If you think I am one of those preparers who makes up expenses and says "you don't have to claim the lawn mowing income" when they are mowing every lawn in town, I hope you know you are wrong.

However .... I found the idea of Grandparents babysitting for free and receiving gifts for appreciation and love not a tax avoidance. I thought it was a creative way to help both parties involved and I would think in this instance the Grandparents aren't in the business to babysit.

If they aren't babysitting for the neighborhood and offering services to others, then to me, clearly they aren't in the business and at that point there is nothing in the law saying they have to be paid for watching their beloved grandkids and there is nothing in the law that states the parents can't give monetary gifts to the grandparents for any occasion they wish to.

Again, I found this thread to be interesting. But I hope it doesn't reflect that I am some kind of a fly-by-nite preparer who would do things that do not conform to tax laws.

[Zee]

Just for the Record .... As a 20 year tax preparer I too would never advise a client to engage in an activity that is clearly tax avoidance. If you think I am one of those preparers who makes up expenses and says "you don't have to claim the lawn mowing income" when they are mowing every lawn in town, I hope you know you are wrong.

However .... I found the idea of Grandparents babysitting for free and receiving gifts for appreciation and love not a tax avoidance. I thought it was a creative way to help both parties involved and I would think in this instance the Grandparents aren't in the business to babysit.

If they aren't babysitting for the neighborhood and offering services to others, then to me, clearly they aren't in the business and at that point there is nothing in the law saying they have to be paid for watching their beloved grandkids and there is nothing in the law that states the parents can't give monetary gifts to the grandparents for any occasion they wish to.

Again, I found this thread to be interesting. But I hope it doesn't reflect that I am some kind of a fly-by-nite preparer who would do things that do not conform to tax laws.

You're right! I did miss something. I thought the suggestion included taking the child care dependent credit. Of course, I don't have a problem with grandparent's watching grandchildren for "free". However, an agreement (formal or informal) to provide a monetary gift based on the child care services provided changes the nature of the transaction. The gift should have no relationship to the child care provided.

Let's assume you approached clients and told them, "I'll prepare your tax return for you, if you will agree to gift me my preparation fee". You'd avoid taxes on the gift, right? How is that much different?

Yes, we are both entitled to our opinions.