Does grandparent's tax exempt earned income qualify towards "earned income" used to qualify for social security/medicare?

Question

Here's the situation:

1. I am married to my wife, we file taxes jointly.

2. My parents are taking care of our kids (both are under 18 years old) in our house and we are paying them $1350/month

3. According to the Household Employer's Tax Guide (Publication 926 https://www.irs.gov/pub/irs-pdf/p926.pdf page 6), we shouldn't "count wages you pay to [parents] as social security or Medicare wages." - this means I don't have to pay any taxes or file any forms about this money I am paying my parents.

4. If my childcare were not from my a "household employee" (aka my parents), then I would normally file Form 2441 (Childcare and Dependant Care) to get the cost of childcare excluded from my taxable income. However, because my parents qualify for the exemption from social security and medicare wage taxes, I do not qualify for the the childcare and dependent care exemption, so I will not be filing Form 2441.

4. This is where things start to get complicated: my mother doesn't have enough years of earned income on file to qualify for social security, so we are planning to have her list the income I am paying her on her Form 1040 Line 7 this year at "earned income" with the abbreviation "HSH" on the dotted line next to it.

5. She will also fill out a 1099 for miscellaneous income for this income.

MY QUESTION IS: will my mother's earned income from this year and situation described above count towards the years of work needed for her to qualify for social security/medicare EVEN THOUGH I, as her "employer," will not be paying the social security/medicare taxes or even reporting this income?

Bonus: I would love if you could link to the relevant IRS documentation to answer my question.

Thank you!

Opus 17 · Answer

Because your mother is providing the care in your home, she is your household employee. Because she is your parent, the wages do not count as social security and Medicare wages.

You have the option of filing a W-2. although it is not required. If you file a W-2, you need an employer ID number from the IRS, you can get this online in 10 minutes. If you issue a W-2; the gross taxable wages will be in box 1 and box 16 (if you live in a state with state income tax) but you do not need to withhold federal or state taxes (boxes 2 and 17) and boxes 3-6 (social security and medicare wages and taxes) will be blank.

If you do not issue a W-2, the household employee would report the gross taxable wages on line 1 of form 1040 with "HSH" next to it.

Household employee wages are eligible for the dependent care credit even though they are not social security and medicare wages. You can claim the credit as long as your mother reports the income.

Because these are not considered social security and Medicare wages, they do not help your mother qualify for retirement or disability benefits. They just don't, that's the whole definition of not being considered social security wages.

Your mother will not fill out a "1099-MISC". That is a form used when a business pays an independent contractor. Your mother will also not fill out a schedule C. That would be for if your mother was considered self-employed or an independent contractor as a care provider. Since she is a household employee, she will not have a schedule C.

It is technically possible for your mother to report the gross income as self-employment income rather than household employee wages. She would then use a schedule C instead of reporting the income as "HSH". Her income would be subject to15% self-employment tax in addition to income taxes, and would then count in the social security system for retirement and disability credits. However, I would be cautious, because filing to claim self-employment wages when one is not self-employed could possibly be considered fraudulent. You may want professional legal or tax advice before you pursue this route.

Remember that a non-working spouse is entitled to social security benefit that is 50% of the working spouse. In other words, if your father is eligible for $1000 per month at full retirement age (66?), then when your mother reaches her full retirement age, she can collect another $500 per month from her spouse's work record. She might have to "work" a lot of years as a caregiver before her own benefit would be more than her spousal benefit, so you might be doing this for nothing. Your mother may also be able to contribute to a spousal IRA based on her spouse's income if the spouse is not retired yet. You may want to consult an elder law attorney or professional retirement planner.