Taxpayer asks:
I have an employee whose child care center fees just went up. So to take some of the burden off her shoulders we are paying for the rest it adds up to $300 a month. Now-her babysitter is her sister in law who works part time but does babysitting on the side. My employee is not going to pay her using 1099. How can we handle this? So our company can use this as a tax write off and she can properly handle it?
Taxgirl says:
Ooh yuck.
I understand wanting to keep your employees happy. I love my employees, I want to keep them happy. But you can’t get yourself into trouble doing it. So, tread carefully.
You can’t touch offering the babysitter money because you’ll be dragged into this under the table mess. Trust me, as someone who has seen both sides of that mess, you want to stay out of it. As much as you may love your employee, what she’s doing by not reporting income paid to the babysitter is wrong.
I see two options:
1, Offer your employee more money and tell her to use it as she sees fit with the hope that it goes to shoulder the extra burden of increased childcare expenses. You must include this extra income on her form W-2 at the end of the year. But your employee is still ahead.
2, Set up a pre-tax Flexible Spending Account that the employee can use for childcare expenses. It’s still wages but it’s pre-tax so there’s a savings to your employee. There are some limitations, so make sure that you check it out. In this case, the downside to the FSA (which is a great option for most employers) is that I suspect your employee’s babysitter won’t provide her SS number. That won’t stop you from setting up the plan but it may stop her from using it.
It’s a tricky situation because clearly, you want to help. But your employee is causing this to be a bigger problem than it needs to be. So here’s my final advice: don’t make your employee’s problem your problem. It’s not worth it. You don’t need an audit or an investigation into your payroll over a few thousand dollars a year.
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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Sounds like the employer has already paid child care expenses, which must be included in box 10 of the employee’s W-2, and Part III of Form 2441. If no expenses are listed on the 2441, the amount in box 10 carries to Line 7 of the 1040 as taxable income. Like you say, it’s a sticky mess!