As a responsible parent, you want to teach your kids the value of honest work. You might even pay your children an allowance for performing household chores, such as babysitting younger siblings. If your child earns money babysitting for other people, even relatives, the Internal Revenue Service considers that taxable earned income. How she files her income tax return depends on whether she was paid as an employee or a self-employed independent contractor.
Employee
Babysitters who work every now and then probably don't qualify as employees in the eyes of the IRS. Babysitters who do may fall under the so-called "nanny-tax" rule that applies to people who pay a household employee $1,800 or more. In that case, the employer has to withhold income taxes, social security and Medicare from her paycheck, and give her a Form W-2 at the end of the year showing her income and withholdings. The sitter will need to file a return if she wants to get an income tax refund.
1040EZ
If the only income the sitter has comes from that job, and she's paid more than the $1,800 limit, she could file her tax return using Form 1040EZ. This is the easiest tax form to file. She just reports her earnings and the amount withheld. If she earned less than $5,800, she shouldn't owe any federal income taxes. She should get a full refund of any income taxes that were withheld from her paycheck, but she won't get a refund for the social security and Medicare portion.
Self-Employed
If the babysitting client didn't withhold taxes, the babysitter is considered a self-employed independent contractor. If a client paid her $600 or more, he owes her a Form 1099-MISC. However, she has to report all of her babysitting income whether she got that form or not. She can report her self-employed income on Schedule C or Schedule C-EZ, but Schedule C-EZ is simpler. Enter the total income on Line 1b and any business expenses on Line 2. Subtract Line 2 from Line 1b and enter that amount on Line 3 of Schedule C-EZ and on Line 12 of Form 1040.
Self-Employment Tax
Not every self-employed sitter is going to get more than $600, and as such not every sitter will owe taxes. To find out, multiply the amount on Line 3 of Schedule C-EZ by .9235. If the result is less than $400, the IRS isn't expecting to hear from that sitter. If the result is $400 or more, the sitter needs to fill out Schedule SE to figure how much tax he owes.
References
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Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.