If you hire a babysitter or nanny on a regular basis, the cost can add up to a significant amount. In some cases, this can have tax implications both for you and the person you hire. Even if you hire a babysitter casually and provide cash payment, it's important to understand the tax code as it applies to your situation.
As of May 2011, paying for a babysitter may make you eligible for a tax credit that reduces the amount of tax you owe. This credit is the Child and Dependent Care Credit. It only applies if you pay someone other than a spouse to care for your child while you or your spouse attend work or look for a job. The amount of the Child and Dependent Care Credit depends on how much you spend on babysitting and your total income.
When you pay a babysitting service or a private individual to babysit your child, you generally do not need to claim any special items on your taxes. Babysitters are independent contractors, not household employees, because they choose how to perform their duties. This means that as the person hiring a babysitter you don't need to withhold taxes or submit payroll taxes to the state or federal government.
If you work as a babysitter, you may need to claim the income you earn on your taxes. The tax code specifies a minimum amount that you can earn as an independent contractor each year without claiming the income on your taxes, which exempts some young people who work as babysitters part time. The exemption limit changes from year to year, so read the tax form instructions carefully. If you work for a babysitting or nanny service, the service will report your income directly to the government and you'll need to claim it as taxable income or risk a penalty.
Another situation that will cause your babysitting expenses to have tax repercussions occurs when you work as a babysitter and have personal expenses that go toward your work. For example, if you babysit at home, the money you spend on supplies and cleaning qualifies as a business expense, and will reduce the amount of business profits you need to pay taxes on. You can only claim these expenses if you already claim your babysitting income and pay taxes on it, but writing off expenses will help reduce your tax liability.