Is Granny a Nanny or Not?

Many families, when confronted with the need for child care or elder care turn to family members rather than strangers to care for their loved ones. The logic being, if I have to pay someone to provide care I would rather it be a family member who would benefit from the additional income.

Household help that earns more than $1,800 in a tax year is subject to what is referred to as the “Nanny Tax” and must be put on payroll. The IRS has a special form expressly for household help, Form H to report household payroll. Household employers are required to file W-2s for their employees along with their annual W-3 Summary Report.

These rules apply whether the nanny in question is an adult from across town as well as the college student who lives next door. However, the IRS makes exceptions to this rule for your parents if any of the following conditions apply:

  • Your child is under 18 or
  • Has a physical or mental condition that requires the personal care of an adult for at least 4 continuous weeks in a quarter
  • You are divorced and not remarried
  • You are a widow or widower
  • Your spouse has a physical or mental condition that prevents them from caring for your child for at least 4 continuous weeks in a quarter

The bottom line is that in most cases Granny is not a Nanny as far as the IRS is concerned and you are not required to put your parents on the payroll even if you are paying them for their time. However, they should be aware that the money you pay them is taxable income.

Granny or Grandpa’s income should be reported to the IRS on her 1040 even though they do not receive a W-2 and are not subject to self-employment tax. The income is taxable as ordinary income and if the amount is substantial enough, they should make quarterly estimated tax payments in order to cover the amount due and not have a tax bill hanging over their head come April 15th.