Not so long ago, parents only had to worry about finding quality child care, not about the tax implications of each type of child-care situation. These days parents need to be aware of the tax laws before choosing a child care provider. Whether to give your sitter a W-2, a 1099 or nothing at all depends entirely on where the care takes place and who provides it.
If you choose a child care center that provides care to several, perhaps dozens of children, you won't need to worry about sending year-end paperwork at all. They will give you the center's federal tax identification number and a statement of how much you paid for child care in January of the following year. Most large child care centers and preschools are corporations, so you have no obligation to send them 1099s.
Although hiring a sitter is often the most convenient child-care option, it can be the most complicated option for tax purposes. Unless the sitter is a student under the age of 18, you may be required to hire him as an employee and withhold taxes from his paychecks. If the sitter is your own child who is under age 19, you can not claim her pay when you file the Credit for Child and Dependent Care on your taxes. The easiest way to have in-home child care and avoid becoming an employer is to hire one or more students who are under the age of 18 at any point in the year and are not the child's siblings.
If you choose to become an employer, certain requirements must be met. When hiring in-home sitters, you must have each employee fill out an I-9 form that certifies her immigration status, as well as a W-4 form so you'll know how much tax to withhold from her paychecks. You may make regular estimated tax payments of your employee's tax liabilities, increase your own withholding tax at work, or risk being assessed an underpayment penalty when you file Schedule H with your 1040 tax return the following spring. Schedule H is the annual return for household employers. You will also be required to provide W-2 forms to the employee and federal government, as well as paying the employer's matching FICA tax, federal unemployment tax and possibly state unemployment tax.
When a child care provider offers services at his own home, he is generally considered to be self-employed. He sets his working hours and determines how he will care for the children. This is a similar situation to a child-care center for tax purposes, except that some home-based providers avoid claiming child-care income on their tax returns. Make it clear from the beginning that you plan to claim the child-care credit on your tax return.
Ask for the child care provider's federal identification number immediately during the sign-up process. You will need this information, as well as the provider's name, address and amount you've paid out of pocket each year, to take the tax credit for dependent care on IRS Form 2441. If the care provider refuses to give you the identification number, you will need to find a different provider. IRS will not allow you to take the tax credit, which can be a substantial amount of money, without the provider's ID number. The only reasons a provider would refuse to give you their ID number is to avoid claiming the income or fear of discovery as an illegal alien.
Send a 1099-MISC form in January if you pay $600 or more to any one child care provider during the calendar year, using the "nonemployee compensation" box to report the amount you paid. You do not need to send a 1099-MISC form if the provider is a corporation or your employee. Required forms and software are available at most office supply stores, or you can hire a local accounting office or an online service to complete the forms and transmittals for you.