My neighbor is going to write off childcare on next years taxes...how much should I save?

Question

I babysit my neighbor's children (2&4) for four dollars an hour. (3hours a day) The mom told me she's going to claim the childcare on her taxes as a business expense/tax writeoff. How much do I need to set aside so that I can pay MY taxes on this income? *grin*
What started out as a "Once in a while" thing has sure mushroomed.
Also, do you know of a website that explains this in detail? Thanks in advance.

Answer 1

You probably wouldn't owe any income taxes on this, but would owe self-employment taxes of 15.3%. So every day you make $12, you'd need to set aside about $2 toward taxes.

You'll need to file a tax return with a 1040A, a schedule C showing the babysitting income and any associated expenses that you have, and a schedule SE to calculate your self-employment income. She should give you a form 1099 at the end of the year showing what she paid you, but whether she does or doesn't, you'll still need to file the return showing the amount she paid you.

Answer 2

How much to set aside for your taxes depends on so many other factors. Do you have other income? Do you file jointly with a spouse? Do you have an IRA? Mortgage interest? What state do you live in? Various states have various income tax rates.

You are making $12 per day. I assume that you do this 5 days a week, so $60 per week, and then times 50 weeks is about $3,000.

Social Security tax on that (including Medicare tax) would be 7.65%. That would be $229.50.

If $3,000 is all you make per year, you shouldn't owe any federal tax (unless you are claimed as a dependent by your parents). State taxes will depend on the state. State income tax rates are available at http://www.taxadmin.org/FTA/rate/ind_inc.html. Look at the low bracket percentage and low bracket size. Check to see if the personal deduction is over $3,000. If so, you owe no state taxes.

Sadly, because our income tax system is so complex, it's not possible to give a definitive answer about what you may owe. A lot of specifics are needed.

Answer 3

Where are you babysitting the children? If you are babysitting them at their home, you are a domestic household employee. You are not an independent contractor since she is requiring you to come to her home on a regular basis for specific duties, and you are not in the business of providing daycare.

Your employer needs to pay her share of SS and Medicare using Schedule H on her tax return. She can also pay your share, which is the simplest arrangement. She will need to issue you a W-2. She also need to pay FUTA (federal unemployment tax). She needs to comply with the minimum wage law, which is $5.15 an hour.

I recommend you require that she treat you as an employee, and pay the payroll taxes. That way, you only pay income tax on the wages. And if that is your only income, that tax is zero.

For further information, read the instructions to IRS Schedule H.

Answer 4

To claim childcare expenses on her tax return, she has to have your ssn or tax id number. If you decide to go along with this, you can request a free tax id from the IRS and your state so you don't have to give out your ssn. You also need to tell her that since you will be required to report the taxable income, you have to charge more to cover taxes. Federal minimum wage is $5.15 an hour, some states are higher.

Answer 5

www.irs.gov

figure at least 25%, or one out of every four dollars you earned will go to Uncle Sam.

Tell her you are raising your rates to $5/hr per child per hour. She will have to find someone else....she will only find you are operating waaaay below the average cost.
Either way, she will still claim what she pays you. You need to claim this as income.
Save your receipts for food/diapers or anything else related to your business (yes, it IS a business) to offset your tax liability and this will help put you into a lower tax bracket.

Answer 6

regnery made one mistake that I noticed. 7.65% is the employee share of Social Security/Medicare tax. You are treated as self-employed. Self-employed individuals pay both halves of SS/Medicare. That equals 15.3%. You are actually supposed to report this even if your neighbor does not.