Daycare Tax Tips

A child care provider is concerned for a colleague with family helpers

Can she really give them a 1099 instead of a W-2?

A child care provider writes:

> I have a friend who does daycare and has hired her mom and sister. They have both been working part-time since June, and she has been paying them both cash ($10hr). Last time she hired them her tax accountant said she could 1099 them. Is this because they are family members, or should she be paying payroll taxes? Any help would be appreciated. I told her I'm almost sure she should be taking out payroll taxes. If so, how does she correct this problem?

Thanks for contacting me. I don't know why an accountant would have recommended preparing 1099s for these workers. You are correct that they are employees and that payroll taxes apply.

There are some special rules for family employees which could apply to her mother (not her sister, though) and reduce the taxes somewhat, but payroll tax returns must still be filed and she needs to give her employees W-2s at tax time.

The time to get caught up on payroll paperwork is before the deadlines at the end of January and definitely before W-2s must be sent to the Social Security Administration at the end of February.

Because she hasn't withheld any taxes from the payments made to her helpers, this provider will have to pay both the employee and employer payroll taxes, unless she can get her mother and sister to pay back the amounts that should have been withheld for social security, Medicare and state disability insurance.

My Payroll Tax Guide talks about what needs to be done for payroll compliance, though catching up after the fact is a little complex. I help providers get caught up on payroll tax returns when they come on board with my payroll service. I don't have enough free time to help others.

If your friend decides not to go back and pick up the employer paperwork, the question becomes whether or not to report the wages as a business deduction on her tax return. I've seen that cause audits before. This issue is discussed my article on child care workers.

If she intends to keep employing her mom and sister, it is important that this provider get compliant with payroll tax rules for the current year, no matter what she does about the prior year.

Posted on 2010-01-24 02:57:20