Child care expense question: We pay our Mother (child's grandmother) $850 a month to watch our baby. Can we count this as a childcare expense?

@M3gatr0n8 

Q. Will I be able to consider her as a family member (grandmother of my child) since shes my girlfriends mother, or will she be considered an independent contractor?  

A.  She is not a family member because she is not related to the taxpayer (you), even though she is related to the child.  Someone will have to pay her social security or Medicare (FICA) taxes. If you and she agree to do so,  she can be considered an independent contractor and pay her own FICA, in the form of self employment tax.

Q. I am also wondering if I can put money into a flexible spending account  (FSA) with my employer to pay her with pretax?

A. Yes.  whether your childcare provider is a  family member, or not, is not relevant. She has to still file income taxes regardless of if you qualify for the nanny tax exemption or not (you don't) or whether you pay with FSA funds or not.  

Read the earlier posts in this thread ... your question was already answered. 

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@cbusa wrote:

If a taxpayers parent babysits their grandchildren in the taxpayers home and the taxpayer pays their parents/child’s grandparents they are exempt from nanny tax? Does the taxpayer need to 1099 their parent for amounts paid? Is the taxpayer able to claim these amounts paid as care expenses in terms of the dependent care credit?

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If the caregiver works in your home, they are your household employee.  You are required to collect and pay the nanny tax unless an exemption applies.  You ARE exempt from paying the household employee tax (nanny tax) if the employee is your parent.  You are not required to withhold federal and state income tax, but you may if you want to.  You must issue the employee a W-2 at the end of the year.  There are several web sites that will issue an electronic W-2 to the employee and e-file the required W-2 and W-3 copies to the IRS and social security administration for a small fee, usually around $5.  

You would never issue a 1099-MISC or 1099-NEC.  If the caregiver is working in their home, they are an independent contractor and are responsible for their own taxes.  Only businesses have to issue 1099s, private individuals do not.  If they are working in your home they are a household employee and you must issue a W-2 if you pay more than $2200 over the year.  If you pay less than $2200, you do not need to issue a W-2, but the employee must still report their income.  

To claim the child and dependent care credit, you must pay a qualifying caregiver to care for a qualifying dependent while you (and your spouse if married) are working.  A grandparent can be a qualifying person for the dependent care credit; however, the grandparent is not a qualifying person if you can claim the grandparent as your dependent (such as because they live with you or you provide most of their financial support). If you are audited, you would need receipts or canceled checks to show what you paid to the grandparent for childcare.   You need the caregiver's social security number to claim the credit.  The IRS will use that SSN to look for matching income on the caregiver's tax return.

Q. Can we still use the child expenses on our taxes?

A.  Yes, you can claim the dependent care credit.  You will have to provide her SS#. 

Q. Will that mess up my wife’s father's taxes?

A. No. It has no effect because the amount is not enough to change the sister's dependent status, assuming she has little or no other income or is a full time student.

Q. Will effect the sister's taxes?

A.  No. It is not enough to have to file (because she sat in your home)  unless she has sufficient other income.

 A dependent child  must file a tax return for 2021 if he had any of the following:

1.          Total income (wages, salaries, taxable scholarship etc.) of more than $12,550 (2021).
2.          Unearned income (interest, dividends, capital gains, unemployment) of more than $1100.
3.          Unearned income over $350 and gross income of more than $1100
4.          Household employee income (e.g. baby sitting, lawn mowing) over $2300 ($12,550 if under age 18)
5.          Other self employment income over $432, including money on a form 1099-NEC

IRS Publication 503 Child and Dependent Care Expenses, page 8, states:

Payments to Relatives or Dependents 

You can count work-related payments you make to relatives who aren't your dependents, even if they live in your home. However, don't count any amounts you pay to: 

1. A person for whom you (or your spouse if filing jointly) can claim as a dependent; 
2. Your child (including stepchild or foster child) who was under age 19 at the end of the year, even if he or she isn't your dependent; 
3. A person who was your spouse any time during the year; or 
4. The parent of your qualifying person if your qualifying person is your child and under age 13.

IRS form 2241 Child and Dependent Care Expenses requires that you disclose the name, address and social security number of the care provider rather than prepare a W-2.

See also this TurboTax Help.

@Tinkvick