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Ask the taxgirl: Babysitter Bonus

December 16, 2008 · 14 comments

Taxpayer asks:

My husband and I both work and we have two young children. For the last two years, we have paid a babysitter to watch our children while we are at work.

Last year, for Christmas, we gave our babysitter a pretty good sized cash gift as a thank you. When we were doing our taxes, our accountant told us that we had to report it as part of our babysitter’s pay for the year. Needless to say, she was not happy.

This year, she suggested that instead of paying her a cash bonus, we pay her rent directly, so that she won’t have to pay taxes on it. That doesn’t sound right to me. I will ask my accountant about it when we do our taxes but can you tell me if it’s true that if we don’t pay her directly that she doesn’t get taxed on it?

We want to keep our babysitter happy because we need her to stick around but I don’t want to get into trouble with the IRS either.

Thank you for your time.


Taxgirl says:

Believe it or not, I have received a bunch of similar emails this month… Not everyone is in the same boat but a number of parents are fretting about whether – and how – to report year end “gifts” to babysitters and child care providers.

First things first: gifts to employees are not really gifts. And for IRS purposes, most in home child care workers are considered employees (for more on this issue, see my prior post on the subject).

So, no matter what you want to call it (a thank you, a bonus, a perk), a gift made to an employee is compensation as far as the IRS is concerned.

And cash gifts – and cash equivalent gifts like Visa check cards or gift certificates – made to employees are always considered taxable no matter what the amount. That’s why your accountant advised you (correctly) that the cash that you gave your babysitter last year was both reportable and taxable.

An exception to this rule is giving a small non-cash gift. Small non-cash gifts, like perfume, books and DVDS, are considered de minimis as far as the IRS is concerned, and thus, not considered taxable. Gifts which are clearly not de minimis, such as an expensive trip, Wii or iPhone, are considered taxable.

I know, I know. The whole thing stinks. But it makes sense. The general idea of a gift is that you’re making it out of “love and affection” without any expectations. Of course, we know that’s not always true. Admit it. You’ve bought a crappy sweater for a not so favorite aunt before solely because you expected her to get you something in return (probably a crappy sweater). So maybe the definition is a bit flawed. But you get the picture.

In contrast, when it comes to employees, you’re making that gift (or least the IRS is going to make the presumption that you’re making that gift) because you have an expectation of something in return. In your case, you’re hoping that the babysitter will come back day after day and do a great job of watching your children. And that’s not a bad thing to have as an expectation. But it does make the case that your “thank you” to the babysitter is really an expectation of continued employment or compensation for services already performed.

Making a cash payment directly to the babysitter’s landlord – or credit card company or loan shark – doesn’t change that picture one bit. It still counts as compensation to the babysitter.

Don’t panic just yet. I know you want to keep your babysitter happy. I get that. I’m a mom. And I know when you find someone that takes great care of your kids, that means a lot. You want to keep that person around for as long as possible. But that doesn’t mean that you have to put your own financial well-being in jeopardy. As I see it, you have a few options.

1, If you want to give your babysitter a certain sum of money, and she’s not happy about paying the taxes, consider rounding up the bonus to include a little extra to pay the taxes. For example, if you wanted to give her $100, give her $120 and explain to her very clearly that you’ve topped up her gift to help her out with the tax bill. This is done quite often in the corporate world.

2, Consider giving her the week off. If she’s an hourly employee and she has the time off without pay, she may appreciate an extra day or two of rest and there are no tax consequences to you or to the babysitter. On the other hand, if you pay her a salary and you choose to compensate her for the time off (or are required to do so by law), the tax consequences to the both of you are the same as if she had worked a regular week but she gets the perk of not actually working. If you can swing some time off yourself, you could schedule some quality time with the kids, making it a win-win for everyone.

3, Consider offering her perks throughout the year to keep her happy so that she doesn’t consider a year end “thank you” as her only thank you. Order in pizza for dinner while she’s working, offer her the use of the computer while you’re away and possibly (depending on her age and experience) the use of the family car while she’s working. Take her along on fun family trips: if she’s working while she’s traveling, the cost of the trip is not taxable to her. Creating a fun working environment may ease some of tension around her compensation issues. If she feels as lucky to have you as an employer as you feel to have her as a babysitter – and she feels that you’re being fair – maybe a few extra dollars won’t matter so much.

4, Pay the rent (or the thank you) and properly report the compensation. C’mon. She’s still ahead here – a lot. If she gripes about the arrangement too much, then maybe she’s not the right babysitter for you. Don’t allow yourself to be held hostage by unreasonable demands – and it’s definitely unreasonable for her to ask you to do something that is not legitimate. Besides, if you’re paying her “under the table” (especially year after year), you’re the one that is losing out: in addition to putting yourself at risk at audit, you don’t get to take the deduction that you would otherwise be entitled to by paying her properly.

At the end of the day, you need to feel completely comfortable with the arrangement. This is someone that you trust with your children. You need to be able to rely on her to be dependable, fair and honest. That is what matters most.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

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{ 9 comments… read them below or add one }

1 Brian December 16, 2008 at 9:49 am

If you go with option 1, your accountant should easily be able to determine what the employee’s gross pay (before taxes) should be to arrive at the net pay you’d like the babysitter to end up with. (i.e., it shouldn’t be too expensive to have him do this)

2 Stacy December 16, 2008 at 10:35 am

Great article. I just wanted to mention that there is not only potential trouble with the IRS, but also beware of your state unemployment commission. The problems usually begin if an ex-babysitter decides to file for unemployment benefits. Also, at least here in Texas the unemployment commission audits quite frequently. At that point you will be glad that you handled all payments to her properly!

3 Joel December 18, 2008 at 7:12 pm

What if you have a live-in nanny, would letting her live rent-free in exchange for babysitting be consider a tax-free benefit? I recalled reading something that if it is for the convenience of the employer, housing (and meals) expenses are not taxable to the employee.

Joel

4 Kelly December 18, 2008 at 7:42 pm

You are absolutely correct. For federal purposes (state tax laws may vary) you can exclude the value of room and board for a live-in nanny if:

1, It’s at your home (and not, say an apartment down the street);
2, For convenience purposes; and
3, It’s a condition of employment.

With respect to meals at your home, it doesn’t matter if the nanny is live-in or not, it’s still exempt since it’s primarily for your convenience. The nanny can’t just leave during the day to go get her own food – who would watch the kiddos? ;)

5 Cash Gifting Forums December 18, 2008 at 10:44 pm

What if you have a live-in nanny, would letting her live rent-free in exchange for babysitting be consider a tax-free benefit?

6 Joel December 19, 2008 at 12:58 am

OK, with the value of room and board for a live-in nanny, it is excludable from her wages; but what does it mean for the parents? Are the parents allowed to claim child care credit from providing the value of room and board?

To complicate the matter just a tiny bit, would the parents have to recognize this as a taxable event and record an income, where the parents would have normally rented out a space in their home for rental income, but in this scenario, is bartering rental space in exchange for nanny services?

Thank you for your previous reply.

7 Kelly December 19, 2008 at 9:34 am

Joel,

The statute (section 119, I think) specifically excludes the room & board from income, so you shouldn’t record it as taxable income. Since there’s no corresponding expense, there should be no credit or deduction.

I think the distinction is that this is not meant to replace otherwise taxable income (meaning the rental), it supposed to be something for the convenience of the employer.

8 joel October 14, 2011 at 8:13 am

i was wander i have a babysitter 5 days a week and have one on some weekends that stays with us we own our own business and i was wandering if this would count as a pay check to the babysitter if we use our business check book for it and count the babysitter as if she was an employee.

9 meka April 19, 2013 at 9:22 am

If she is complaing about a bonus – money she was given and did not have to work extra for it, maybe you shouldnt give her a bonus at all. Even if she has to pay taxes on it, it was basically a gift to her.

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