Hiring My Parent as a Household Employee for Childcare - Income and ACA Credits Question

Thanks for confirming! Do you know if there's any specific documentation we should maintain besides just keeping records of payments? Like should we have some kind of written agreement about hours and pay rate, or is tracking the actual payments sufficient? Also, any idea roughly how much income would start to impact ACA subsidies? My mom is on an ACA plan and currently makes about $28,000 a year from her part-time job. I'd be paying her around $12,000 annually for childcare.

Having a simple written agreement outlining the work arrangement, hours, pay rate, and duties would be very helpful. This doesn't need to be complex - just a basic document you both sign. Keep payment records too, whether you pay by check, electronic transfer, or even cash (though I recommend a traceable payment method). For ACA subsidies, it varies based on household size and location, but generally, subsidy amounts gradually decrease as income increases. At $28,000 plus $12,000 additional income, putting her at $40,000 total, she might see a reduction in subsidies. The key thresholds are based on percentages of the Federal Poverty Level. At 400% FPL (about $54,000 for a single person), subsidies used to cut off completely, but recent legislation has extended subsidies above this amount with a cap on premium costs at 8.5% of household income. I'd recommend using the Marketplace calculator on healthcare.gov to estimate the specific impact for her situation.

Does it actually work for these specific household employee situations? I tried using TurboTax for this and it kept getting confused when I explained I was hiring my parent and qualified for the exemption.

I'm a bit skeptical about these tax tools for niche situations like this. Does it specifically address the parent-as-childcare-provider exemption? And does it keep up with the ACA subsidy changes from the American Rescue Plan?

It absolutely works for parent-as-childcare household employee situations! Unlike TurboTax which sometimes struggles with these exemptions, taxr.ai specifically asked me about our relationship to the employee and immediately recognized we qualified for the federal employment tax exemption. It walked through each tax form line by line. Regarding the ACA subsidy changes, yes, it's fully updated with the American Rescue Plan provisions and even the Inflation Reduction Act extensions of those enhanced subsidies. It calculated different scenarios showing exactly how much my father-in-law's subsidies would change at different income levels, and even suggested optimal payment structures to minimize the impact on his benefits. The simulation feature alone was worth it since we could see the actual numbers before making decisions.

How exactly does this service work? Do they just call the IRS for you? Couldn't I just do that myself if I'm patient enough?

Sorry, but this sounds too good to be true. The IRS phone lines are notoriously impossible - I've tried calling dozens of times about my household employee question and never got through. Are you saying this service somehow gets priority access? That doesn't seem possible since the IRS doesn't offer that.

The service doesn't just call the IRS for you - it uses a specialized system that navigates through all the complicated IRS phone menus automatically and then holds your place in line. When they're about to connect you, you get a call back and are immediately connected to the IRS agent. You don't have to sit on hold for hours or keep redialing when you get disconnected. No, they don't have "priority access" - they're using the same phone system everyone else uses. The difference is their technology handles all the waiting and navigating for you. Think of it like having someone wait in a physical line for you, then texting when they're about to reach the front. The IRS has no idea you're using a service - you're the one who actually talks to the agent. I was skeptical too, but after trying for weeks on my own and getting nowhere, this got me through on the first attempt. It saved me literally days of frustration.

That's a really good point! I briefly mentioned state unemployment insurance in my post but didn't think through all the implications. Did you also have to withhold state income tax from your parent's payments? And did you have a formal payroll system or just track it manually?

For state income tax withholding, it depends on your state. In my state (NY), I wasn't required to withhold state income tax if both my parent and I agreed in writing, but I did need to inform them they'd be responsible for paying estimated taxes. Some states make withholding mandatory regardless. I started with a manual tracking system - just a spreadsheet where I recorded hours and payments. But after getting hit with penalties for missing some quarterly filing deadlines, I switched to using a simple payroll service that handles all the state filings automatically. It costs a bit, but it's worth it for the peace of mind. Just make sure whichever service you use understands the federal parent exemption - some payroll services try to apply federal withholding incorrectly in these situations.

That's actually backwards - if you're paying your parent MORE than market rate for childcare, the excess could be considered a gift FROM you TO them. But if you're paying LESS than market rate, there's no gift tax issue because your parent is essentially giving you a "discount" on services, which isn't taxable. The IRS generally doesn't get involved in family "bargains" like this unless there's clear evidence of tax avoidance. As long as you're paying a somewhat reasonable rate for childcare in your area (doesn't have to be exact market rate), you should be fine.

This is such an important point that I hadn't considered! My mom is 64 and receiving Social Security, so this could definitely impact her benefits. At $12,000 annually, she'd be well under the $22,320 limit, but it's good to know about that threshold. The voluntary Social Security contributions idea is interesting too. Would she report this as self-employment income on Schedule C instead of wages on line 1b if she wanted to make those contributions? And would that change any of the other tax implications we've been discussing? Also, does anyone know if the Social Security earnings limit applies to the total of ALL her earned income, or just the household employee wages? She makes about $28,000 from her part-time job plus the $12,000 I'd be paying her.

The Social Security earnings limit applies to ALL earned income, not just the household employee wages. So if your mom is making $28,000 from her part-time job plus $12,000 from childcare, that's $40,000 total - well above the $22,320 limit. This means her Social Security benefits would be reduced significantly. At $40,000 total earnings, she'd be $17,680 over the limit ($40,000 - $22,320). Social Security would reduce her benefits by $8,840 (half of the excess). This is a major consideration that could outweigh any benefits of the arrangement. Regarding the voluntary Social Security contributions - yes, she could potentially report this as self-employment income on Schedule C instead of wages on line 1b, which would subject it to self-employment tax (15.3%). However, this doesn't change the Social Security earnings limit calculation - self-employment income still counts toward that limit. The main benefit would be earning additional Social Security credits if she needs them for future benefit calculations. Given her current income level and Social Security status, you might want to recalculate whether this arrangement makes financial sense, or consider reducing either the childcare payments or her other work hours to stay under the earnings limit.

This is really helpful advice about creating a decision matrix! The hybrid approach you mentioned is brilliant - I hadn't thought about supplementing with non-cash benefits. That could be a great way to provide additional value to my mom without pushing her over the Social Security earnings limit. Just to clarify on her age - she's 64, so definitely not at full retirement age yet. Full retirement age for her birth year would be around 66 years and 2-4 months, so we're still dealing with the earnings test. Your point about the reduced benefits being like "forced savings" is interesting, but I'm wondering about the cash flow impact in the meantime. If her monthly Social Security gets reduced by hundreds of dollars, that could create a real financial hardship even if it means higher future payments. The $8,000 payment idea might be the sweet spot - keeping her total at around $36,000, which would still trigger some benefit reduction but not as severe. Do you remember what other non-cash benefits you provided that didn't count as income? I'm thinking things like paying for her groceries when she's watching my daughter, or covering her phone bill since she uses it for our childcare coordination.