Daycare Tax Tips

Swapping free rent for child care help?

This type of bartering has tax consequences

A family child care provider writes:

> My daughter and her husband live with me rent free in exchange for my daughter acting as my helper in my large family daycare. I would not consider her an employee in this case, but do not know what the law states. Do I need to establish workers comp for her even if I do not pay her?

From a tax point of view, what you are doing is bartering. Just because no cash is involved, however, doesn't mean there aren't tax consequences. The rent that your daughter and her husband are not paying to you is nevertheless rental income to you. The money that you are not paying to your daughter is nevertheless taxable earnings to her.

The Internal Revenue Service keeps a sharp eye out for bartering situations because they often result in taxes not being paid. (In your case, both income and employment taxes.) This is why the rules state that bartering income is nevertheless taxable and the IRS does not hesitate to treat it as such when they uncover these situations.

This arrangement with your daughter is probably also a violation of California labor law, because you are not paying minimum wage and you are avoiding all employment taxes. Even workers' compensation Insurance coverage is required.

My best recommendation, for your own protection from tax and liability problems, is to stop bartering. Pay your daughter an hourly wage and have her pay you a reasonable rent.

Here is a bartering article from Tom Copeland that says essentially the same thing.

Posted on 2010-06-04 22:06:35