ASK THE EDD LAWYER- PLEASE EXPLAIN THE CHILD AND DEPENDENT CARE TAX CREDIT. MAY I TREAT THE CAREGIVER AS AN INDEPENDENT CONTRACTOR FOR EDD PURPOSES?
By Robert S. Schriebman
We know a couple who recently had a baby. Mom and Dad work out of their home. They have hired a caregiver for the baby. She or he works a few hours a day. She or he is paid by check. I recently informed them about the Child Care Credit, but I also discussed with them whether they can treat the caregiver as an independent contractor.
Many people pay for the care of their child or other dependent while they’re at work. The Child and Dependent Care Credit can reduce that cost. Here are a few pointers from the IRS about this this tax credit:
- You may qualify for the credit if you paid someone to care for your child, dependent or spouse last year.
- The care you paid for must have been necessary so you could work or look for work. This also applies to your spouse if you are married and filing jointly.
- The care must have been for ‘qualifying persons.’ A qualifying person can be your child under age 13. They may also be a spouse or dependent who is physically or mentally incapable of self-care. They must also have lived with you for more than half the year.
- You, and your spouse if you file jointly, must have earned income such as wages from a job. Special rules apply to a spouse who is a student or disabled.
- The credit is worth up to 35 percent of the qualifying costs for care, depending on your income. The limit is $3,000 of your total cost for the care of one qualifying person. If you pay for the care of two or more qualifying persons, you can claim up to $6000 of your costs.
- You must include the Social Security number of each qualifying person to claim the credit.
- You must include the name, address and identifying number of your care provider to claim the credit. This is usually the Social Security number of an individual or the Employer Identification Number of a business.
- To claim the credit, attach Form 2441 to your tax return. If you use IRS e-file to prepare and file your return, the software will do this for you.
In Article No. 112, I discussed the difference between a deduction and a credit. A deduction allows you to subtract certain expenses to arrive at your taxable income. It is essentially an offset. A credit, on the other hand, is a dollar-for-dollar discount from the tax liability itself. Think of it as a credit on your credit card bill. With a credit you can save some significant dollars. A $3000 or $6000 child care credit can represent a significant tax savings.
May the young couple above treat the home caregiver as an independent contractor for EDD purposes? This is not an easy question to answer. Clearly if the child is dropped off in the morning with a professional outside childcare service, a day school, or a nursery school that facility is not your employee. These people are licensed and hold themselves out to the public to be in the business of childcare and education. Things are different, however, if the childcare services are rendered in the home. There was always an element of control and supervision by the parents. Anytime you have a control factor you have an employer-employee relationship according to the EDD. There is a gray area within EDD regulations when it comes to the category of caregivers. The regulations are complicated and vague. When you are dealing with an EDD auditor you can expect to have issues of vagueness resolved in favor of the EDD. You will have to demonstrate that the caregiver is in business for herself or himself. You prove this by whether the caregiver has a listing on the internet and works for others. Does the caregiver bill by written invoice? Will the caregiver furnish references proving that she works for others? Does she or he have a fictitious business name or dba? Does she have a federal employer identification number (EIN)? None of these issues are clear cut.
For more on this topic see Publication 503, Child and Dependent Care Expenses. You can get it and Form 2441 on IRS.gov.
An EDD lawyer, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States.
As a trusted EDD attorney, Robert S. Schriebman has successfully dedicated more than 30 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House and the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure”, both published by Commerce Clearing House.