Social Security Credit?

Question

My parents are taking care my children during I am working, and I provide them wages. Since they just received the green cards few months ago, and I am planing to let them receive the Social Security Credit. Could anyone provide me answers or some more detail for the following questions?

1. Am I their employer? Do I need to pay IRS their wage withholding tax every month?

2. How can I report their wage (my spending) on my 1040?

3. How can they report their income? What kind of income prove they need to have from me?

4. If their taxable income (after deduction) is 0, but they do report 1040 to IRS, can they still get the Social Security Credit?

ex: they need to earn aroung 7000 per person to ensure the 4 points of social security credit. If I am not claim them as dependencies and if both of them will earn 14000 in total, in this case, 14000 is small than deduction (10700 standard deduction + 3400 per person).

5. If I report them as my dependencies, can they still earn the Social Security Credit?

Thanks

Answer 1

The payments your parents receive earn Social Security credits only if the children live with you, are under age 18, and you are unmarried, widowed, divorced, or married to a person who because of disability cannot care for your children.  

1. Am I their employer? Do I need to pay IRS their wage withholding tax every month?

You are their employer if they care for your children in your home.  You can take care of the Social Security and Medicare taxes you pay on their behalf by filing Schedule H with your tax return.  You do not have to send in withheld tax every month.  Read the directions to Schedule H of Form 1040.

You are not their employer if the children go to their home.  I assume this is not the case.

2. How can I report their wage (my spending) on my 1040?

Their wages are not a deduction for you.  You may get a Child Care Credit of between 20% - 35% on $6,000 of your expenses.  This will reduce your income taxes by up to $2,100.  Use Form 2441 to report your payments and figure this credit.

3. How can they report their income? What kind of income prove they need to have from me?

They need check stubs or bank account deposits into their accounts, concurrent with the service provided.  If they are your employees you issue a W-2 to them showing the wages paid.   You send a copy of the W-2s to the IRS.  See Circular E (Pub 15) at irs.gov.

4. If their taxable income (after deduction) is 0, but they do report 1040 to IRS, can they still get the Social Security Credit?

Yes.  If they are your employees, you can pay their SS and Medicare taxes when you file your tax return.  On $7,000 of wages, this tax is about $1,000.  You can pay both employer and employee share if you choose (this is the better option given your information).  Attach Schedule H to your tax return.

5. If I report them as my dependencies, can they still earn the Social Security Credit?

If you pay wages to your parent of $3,500 or more, they are not your dependents even if you support them.  I will assume you do pay at least this amount to each parent.  You cannot claim them on your tax return as dependents.  

If you paid each parent less than $3,500, they could possibly be your dependents.  They could also receive some SS credits as described above.  You would be disqualified from receiving the Chld Care Credit for expenses paid to a dependent.

Answer 2

Are they taking care of your children in YOUR home, or THEIR home?  If the care is taking place in YOUR home, they are your employees and yes, you have to take out taxes and pay in their withholding to the IRS.  If they don't live with you and they are caring for the children in THEIR home, then they aren't your employees and would have to handle their own taxes.  In either case, they will get social security credits if they are making enough.  

If they are not your employees, they'll pay into social security if they make at least $400 for the year.  

If they are your dependents, yes they can still earn social security credits, but you can't take a child care credit on YOUR taxes for what you pay them.  If they are not your dependents, you can claim a child care credit.

The money you pay them for watching your children is part of THEIR contribution to their own support, not yours, when you go to calculate how much of their support you provide to determine if you can claim them as dependents.

They will report their income on a schedule C or C-EZ, use a schedule SE to calculate their self employment tax (for social security and medicare) and a form 1040.  If their taxable income is zero for federal income tax, because of the standard deduction (and their exemptions if they are not your dependents), they'll still owe the self employment tax.