A few weeks ago, while providing Accounting and Tax-related services to one of my clients in the Real Estate niche, I was hurled a question to deal with which was if she should be giving a 1099-Misc to her babysitter or is she liable to provide W-2?
Though at that time, the answer looked quite simple to me but then I realized that’s only because of my job’s nature.
I’ve been doing the books and the taxes for my clients for quite some time now. So quite obviously, it won’t be difficult for me to figure out how they should be treating their babysitter.
However, same wouldn’t be the case for the laymen and I won’t be surprised if they’re left scratching their heads solving this conundrum.
I get it, tax is quite confusing.
So I decided why not write a simple guide to help my readers decide if they should be issuing a W-2 or 1099 to the babysitters. However, before doing so let me clarify very quickly that I’ve used the term, babysitter in this article but the rules equally apply to the nannies, housemaids or any other individual who provide their services in your home.
Secondly, just for those who don’t know the difference between W-2 and 1099, here’s a very quick guide for you.
1099 or W-2. What’s the Difference?
1099 (or 1099-Misc) are issued to the contractors who are not employees of the entity issuing 1099.
On the other hand, W-2 is issued to the employees. Moreover, in W-2, you deduct the Federal Withholding from your employee’s paycheck and submit that deducted amount to the tax authorities while there are no significant deductions in form 1099 that the issuer is supposed to withhold.
So if we need to summarize in a very few words the basic difference between a 1099-Misc and W-2 form is that the former is issued to a non-employee (if paid more than a total of $600 in a year) while the latter to an employee.
Getting that out of the way, let’s focus on the sweet nectar of the debate.
And that’s should you be giving a 1099 or W-2 to the babysitters who tend to your babies?
Unfortunately, the answer to whether you should grace the service providers with a W-2 or 1099 is not that simple and depends on several factors. So I’d be answering the basic questions to simplify and help make your mind about any of the two tax documents.
So let’s get started.
Can you issue 1099-Misc to your babysitter as an individual?
As an individual, the IRS does not make it compulsory to provide 1099s to your contractors. So if you hire a babysitter’s services as an individual and not in the due course of your business, you may not provide them with the form 1099-Misc.
However, if you run a business and hire the contractor’s services in the due course of your business only then you can treat the expense as a contractual expense and provided that you’ve paid the contractor $600 or more in a year, you need to provide 1099-Misc to the IRS, state department of revenue and the contractor as well.
In case you’re an individual and/or hired the babysitter’s (or any other contractor’s services) as an individual then you may not need to provide 1099-Misc to the contractor.
Because the 1099-related expenses are tax-deductible.
What this means is that you can claim tax benefits on this expense and filing as an individual, you’re not allowed to claim tax benefits on any expenses. This privilege is only available to the businesses.
Does this mean that if it’s not 1099 then it’s W-2? Right?
Obviously, if it’s not this way then it should be that way.
Well, that’s not necessary.
Keep reading below.
Do you need to provide Form W-2 to your babysitter as an individual?
Continuing from above, the logic dictates that if you cannot provide 1099s to your contractor then it should be the form W-2.
After all, you need to document your spending one way or the other!
Well, the answer is yes, ONLY IF the following conditions satisfy:
- The babysitter (or contractor) is not self-employed
- Workers you DON’T get from agencies who decide who does the work and how it is done
- You paid $2,100 or more to the contractor for the year. That’s the limit of the year 2018.
Before going further, let’s answer another question that has just arisen and I’m sure you must have started pondering about after reading the above list.
Also Read: How to complete Schedule C?
How to decide if the babysitter (contractor) is self-employed?
If you need to decide between 1099 and W-2, knowing the answer to this question is quite important. How’d you even know if the babysitter falls under the realm of self-employment?
To figure out the answer, just be cautious about this factor:
- Do you provide instructions to the babysitter how to carry out the job?
If the answer to the above is no then the condition alone is sufficient to classify the contractor as a self-employed professional but still, if you’re confused, appreciation of a general fact that normally a self-employed professional who provides services to the general public and brings his own tools to the work, would be quite helpful.
Moreover, if you hire an agency who decides who is supposed to act as your babysitter and the babysitter follows the agency’s set of rules to discharge her services then she cannot be classified as your employee and therefore, you don’t need to issue a W-2.
Does being part-time or full-time effects which form to issue?
No, it does not.
Once you figure out whether it’s the 1099 or the W-2, being part time or full time does not have any effect.
How to report babysitter’s expense in your individual tax return?
As we’ve discussed above, if you’re an individual and hire the babysitter’s services outside the due course of your business then issuing 1099-Misc is out of the equation.
The only document you can now issue is the form W-2 and that’s only when you meet the conditions we’ve discussed above.
Now, for the sake of argument, let’s say you’re liable to issue W-2 to your babysitter then in addition to filing the W-3 form, you need to report this expense in Schedule H and file it along with your tax return. Form 1040.
Note: You need to have an Employer Identification Number (EIN) to file Schedule H
How to report babysitter’s expense in your business tax return?
As a business, you can claim tax deductions on your babysitter’s expenses either as contractual employee expenses (if issuing 1099-Misc) or under salaries and wages (if issuing W-2).
Before ending, lets summarize all the above points so that there’s no confusion left:
- As an individual, you do not need to issue 1099-Misc to your babysitter, However,
- As an individual, you need to issue W-2 only if you instruct the babysitter how the work is to be done and the total wages paid for the year are $2,100 or more. You need to make sure to deduct the proper Federal Withholding and other applicable state and federal level withholding taxes.
- As a registered business entity, you may need to issue 1099-Misc to the babysitter if you’re paying her $600 or more in the due course of business and the babysitter or the agency from where the babysitter was hired gets to decide who is supposed to work and how the work is to be done.
- As a business, if the conditions in point number 3 above do not meet, then you need to issue W-2 to your babysitter making sure that you deduct the proper Federal Withholding and other applicable state and federal level withholding taxes.
Lastly, in order to simplify further, I hope the graph below will prove to be quite useful.