[Editor’s Note: My daughter Whitney is a paid columnist here at WCI. She did her own taxes this year, and was bummed to be hit by a $110 tax bill. I woke her up on the morning (at 11 am) this was written with good news and bad news. The bad news was that she would need to file a 1040X. The good news was that she overpaid her taxes. She explains why in the post below and also how to fix your own tax mistakes. As usual with posts by Whitney, you are expected to be extraordinarily polite in the comments section.]
It turns out I made a mistake. Someone commented on my previous post that my 2016 babysitting money ($775) isn't self-employment income, it's household employee income. Which means I didn't actually owe that $110 in payroll taxes I paid. And since $110 is a lot of money to me, it was worth filing a 1040X to get it back. This post is going to discuss the household employee rules, both for the employee and your likely situation- the employer. It is also going to talk about filing a 1040X (the form you use to correct mistakes on your tax return.)
Household Employee Tax Rules
I am a household employee because I babysit at other people’s houses and not my own. While I’m in their house they can dictate what is to be done and how I do it, which means I am employed by them.
What is a household employee?
A household employee is someone you hire to do household work who isn't running a business doing that work. I know that's a little gray, and it's a little like the W-2 vs 1099 question for doctors. Basically, if you can dictate what they do and how they do it and provide all the tools for the job, they're your employee. Some examples might help.
Babysitting:
If you drop your kids off at someone else's house, they're not your household employee. If you hire the neighbor girl to watch your kids at your home every Friday night and you provide the pizza, she is your household employee.
Lawn care:
The teenager next door comes over each Saturday morning and mows your lawn. He uses your mower and your gas and you give him $20. He's a house hold employee. But if you hire Rex's Lawn Care and Rex has three trucks and 12 employees, has his own website and brings his own lawnmower, Rex is self-employed.
There is obviously some gray in between these examples. When something is gray, call it in your favor. But in my case, it isn't gray at all. I'm a household employee of several different households.
Withholding Taxes and Issuing W-2s
Here's your biggest worry. If you pay any one household employee more than $2,000 in a year, you have to pay the employer half of their Social Security and Medicare taxes and withhold the employee half. And you have to issue them a W-2. If you pay more than $1,000 to all of your employees in any given quarter, you also have to pay federal unemployment tax. You pay all these taxes using Schedule H.
Most child employees do have to pay Social Security tax, but there are three exceptions– if you work in the family business, if you are a household employee, or if you deliver newspapers.
Your household employees may ask you to withhold their income tax, and you can withhold it from them if you want to, but you don’t have to. The best resource to learn more if you use a nanny or something is Publication 926. Here's the quick version.
Why $2000?
Before 1994, you had to withhold taxes on anyone you paid more than $50 a quarter to, so there were tons of people violating the law just hiring babysitters. Congress changed the law to make it a little more reasonable, $1,000 a year. That has been increased over time to $2,000.
The Dependent Care Credit
If you paid a babysitter, summer camp, day care, or other care provider to take care of your child under 13, or a disabled dependent of any age, you may qualify for a tax credit of up to 35% (only 20% for most docs) of qualifying expenses of $3,000 for one child or dependent, or up to $6,000 for two or more children or dependents. However, there are some qualifications:
First, you must have made money for the tax year.
Second, you must be the parent or main caretaker of the child or dependent.
Third, the care service must have been used to work or look for employment, not just a date or a vacation.
Fourth, the childcare provider cannot be your spouse, dependent, or the child’s parent. So basically my dad couldn’t pay me to watch my siblings while he works and get a tax credit. You take this credit on line 49 of the 1040 using Form 2441.
The Employee Perspective
As a household employee, you can make up to $2,000 per employer before you owe any payroll taxes. That means a really hard-working kid could have four different household employers, earn $1500 from each, and still not owe any payroll or income taxes.
That kid, of course, won't get any credit with Social Security. Generally, you get one quarter's worth of credit for each $1300 you earn and pay Social Security taxes on. But if you're a household employee, you only get credit if you earn at least $2,000 from a single employer.
Filing my 1040X
My dad and I discovered that it was infinitely easier to do the 1040X by hand instead of doing it on TurboTax (what we used to originally do my taxes.) Basically, you use your 1040 and transcribe what isn’t changing then make any new changes.
So mine looked like this.
You also have to give a quick explanation of what you screwed up. Here is mine.

My first tax refund! $111.96
Then you put the 1040X in an envelope with any schedules that had to be changed (none in my case.) Pretty easy. Only took us about 5 minutes. That's a lot better hourly rate than what I got paid to write this post. A few weeks later I got a check in the mail for $111.96 ($110 + interest.)
What do you think? Do you have household employees? Has it been easy for you to do a Schedule H each year? Have you ever had to file a 1040X? What was that like? Comment below!
Whitney – This is Post is impressive. Well written with some fantastic tax code education included. Congrats on your additional return. Isn’t it amazing what you can learn when you publish your financial life for all to see? Please keep up the good work.
An important topic for sure. We have done both: hired teens to clean and babysit, and filed amended tax returns. They really are simple. I would appreciate more information on hiring your children for your business. We are purchasing a farm that I (the stay at home spouse) intend to run for profit with the children to offset our college fund contributions. With my husband’s high income, would it be best to have the kids just own the business outright (doable) and have them do all the work and own the profits as they have a lower tax bracket, OR should I own the business, and pay the kiddos resulting in an ability to deduct expenses (like the tractor) and lower our property taxes by about 3k by switching to agriculture? I am hoping to grow the business to approx 20k/yr income. Specific or general or ANY info/thoughts appreciated. Keep up the good work!
Crulemn: I assume the farm is jointly owned with your husband. Minors can not in and of themselves own property, so they couldn’t by any equipment such as tractors, etc.. There are ways around this, but it is just not practical for them to own the business,
You best option is to run the business yourself. If you do this as a sole proprietorship or partnership with your husband, FICA is not required < 18 and FUTA is not required < 21 for employees who are your children. A partnership tax return is much more complicated than a sole proprietorship. I strongly suggest the latter. Unlike the kiddie tax for investment income, the child's entire earned income is taxed at their rates. This means that they will pay no income tax until their wages exceed the standard deduction of $6350 for 2017. However, you must pay them Fair Market Value (FMV) wages. From a practical and parental responsibility point of view you might want to follow federal/state work hour restrictions even if you are exempt. Note: If they have investment income, under the kiddie tax rules for 2017, there are an exemption and standard deduction of $1,050 each. However, if they have earned income, the standard deduction becomes earned income + $350, but not > $6350. Essentially, the investment income standard deduction drops to $350 and starts to be phased out at an earned income of $6000.
Lucky you. I could not get my son to work for me. He can write well and also a great artist but would not work for me. I remember a couple years ago when he was working part-time at a nearby grocery store and making the minimum, I did his taxes also and was excited about his $90 refund. How did you get your daughter to work for you? Any tips?
Whitney- congrats on the refund! As I recall, even better when you had WCI cover the initial tax liability.
YES! We deposited it at the bank this week so now I’m $111.96 richer! 🙂
Yes, we still need to have a discussion about what that money is going towards…
I recommend this….12 boxes worth…
Your welcome WCI 😉
https://www.amazon.com/ALEX-Spa-Hair-Chalk-Salon/dp/B00E24BM2U/ref=as_li_ss_tl?_encoding=UTF8&psc=1&refRID=Z0ASBZDN7WC7MGVD6Y9R&linkCode=sl1&tag=bobbyheavy-20&linkId=88ad645f681977f74dbc2cdf81e39af7
Also,
Great article and good job trying to interpret our cray cray tax code!
She’s talking about a new phone. We’ll see how much ends up in the 529.
Well maybe something more like this… 🙂
https://www.amazon.com/dp/B015E8UTIU/_encoding=UTF8?coliid=I2S9PT0ECTVTWZ&colid=1CR9S1ZZF5894
That “employee” phone could be a work expense and a write off for your dad! How else are you going to research your future posts!
He is so going to block me from future comments.
Your knowledge of the tax code is impressive, Whitney. I doubt that 5% of taxpayers know as much about it as you do.
Seriously Whitney, congrats! I had no idea on all this tax stuff and thankfully our babysitter/s never get over 2000K in a year. I will have to keep an eye on the 1000K in a quarter though so I don’t chunk trips together….
Very impressive, I was actually looking this up last week and your post was much easier to follow than any of the other articles I read.
So what is your investment plan? Future post?
I think the next post will be about my four accounts.
Whitney this is an excellent post. Thank you! Do you fund a Roth IRA with your babysitting money?
Yes I do.
What a well written post! My son mows the neighbor’s lawn (using our mower so he’s self employed) so I appreciated your example.
I did have one question. Does this change your ability to contribute to your Roth IRA?
Nope I can still put as much money as I make in my Roth IRA.
As you know Roth is only $5500 per year. You need to charge more for your articles : )
This post is subpar for people with expertise in the field. For someone like me, is a fantastic piece of literacy because despite being doctors, it dumbs down the tax code as it is. Commendable effort.
I dont know if I more impressed you got your kid to do this or that your kid was willing/able to do this. Either way, kudos, great parenting/childing.
BroBo
Great post Whitney!
Your parents are doing a great job raising you and instilling financial literacy at such a young age.
I have a question regarding funding your Roth IRA with babysitting money. My daughter baby sits as well and we’d like to fund her Roth IRA.
1. Could you or your dad please inform me at what dollar amount would my daughter be required to file a tax return.
She currently earns about 1,000.00 per year in cash.
Is there a dollar amount where she would not be required to file taxes?
2. And, if she has to file a return can she do so without a W2 or 1099. The families she works for pay her in cash. So she really has no documentation other than an excel schedule that we keep.
3. Lastly, what kind of documents do you keep in case the IRS comes knocking.
Thank you so much for your posts and any help you can provide.
Gino
1. Yes. See page 9 of the 1040 instructions. You can also often put a kid’s income on your own return. Basically earned income over $6,300 or unearned income over $1,050. Also one other odd rule that says if your income is more than the larger of $1,050 or your earned income + $350. I don’t think JUST contributing money to a Roth IRA requires you to file, but it seems like a good idea to me.
2. Yes. WCI, LLC declares tons of income each year for which we don’t get a 1099. In fact, now that we’re filing as an S Corp, people don’t even have to send us a 1099.
3. The tax return itself and the W-2 issued for her modeling. There is no documentation of the babysitting income aside from the tax return where it is declared.
Thanks Jim for the additional information.
And, as you have already suggested, others articles I’ve just read also suggested the same.
That is to file a return even if my daughter isn’t required to do so just so that there is a paper trail to show the earned income that was used to fund the Roth.
I’m going to finally pull the trigger and fund her Roth with her baby sitting money.
I’ve been discourage for awhile for fear of IRS troubles but I can’t let another year go by without taking advantage of this great opportunity to jump start her nest egg!
Thanks for all that you have done to help us learn how to become savvy with our money.
I stumbled upon your years ago and your “live like a resident” resonated with me.
Although I am not a doctor, i have followed your advice and it has made a dramatic impact on our finances.
I am proof that it can be done. I am a police officer and my wife is a teacher. We have lived by your principles and have amassed a seven figure index portfolio at Vanguard. With zero debt.
If I could find afforadable healthcare I’d retire when I turn 50. But unfortunately I can’t. The streets of Chicago are a war zone and I’m ready for a change of scenery.
Thanks again Jim!
Congratulations on your success!
Be sure you check out health sharing if that’s truly the only thing keeping you from retiring.
https://www.whitecoatinvestor.com/health-sharing-versus-aca-health-insurance-plans/
By the way, it’s $400 in earned income if you’re self-employed.
Hi Jim,
I would like clarification on the W2 issue.
If a household employer pays a household employee $600.00 or more in a given year, they are required to issue a W2. Is my understanding correct?
Thanks,
Gino
The $600 limit is for 1099s. If you pay a contractor $600+ and they don’t file as an S Corp, you’ve got to send them a 1099. I don’t know of any $600 limit that applies to household employees. You have to withhold taxes if you pay them more than $2K. But I don’t know that there is any other limit above which you have to give them a W-2. I’d assume it is $2K unless I could find another limit somewhere.
This page says if you don’t have to withhold, you don’t have to do a W-2 for a household employee:
https://www.irs.gov/taxtopics/tc750/tc756
The instructions for W2 on IRS.gov here says you have to issue a W2 if:
• You withheld any income, social security, or Medicare tax from wages regardless of the amount of wages; or
• You would have had to withhold income tax if the employee had claimed no more than one withholding allowance (for 2019 or earlier Forms W-4) or had not claimed exemption from withholding on Form W-4; or
• You paid $600 or more in wages even if you did not withhold any income, social security, or Medicare tax.
Only in very limited situations will you not have to file Form W-2. This may occur if you were not required to withhold any income tax, social security tax, or Medicare tax and you paid the employee less than $600, such as for certain election workers and certain foreign agricultural workers.
(It doesn’t specifically mention anything about household employees here)
Ref: https://www.irs.gov/pub/irs-pdf/iw2w3.pdf (Page 5)
I believe this is a bit of a grey area- because I have heard a CPA say there is no minimum wage, below which you do not have to issue a W2.
Jim,
I found this post by Spirit Rider on the Bogleheads. According to his post if I am reading it correctly, he states that income equal to or greater than $600.00 requires the household employer to issue a W2. Do you think this is accurate?
Thank You,
Gino
Re: Funding an IRA for children.
Quote
Post by Spirit Rider » Sat Oct 21, 2017 2:37 pm
Read my reply again. There are different limits for filing of W-2, withholding FICA and make FUTA payments.
If a household employee receives :
Wages = $600 and = $1000.
Wages >= $2,000, a W-2 is required, FICA is required to be withheld and no FUTA payments are required unless wages in any quarter >= $1000.
Income >= $6,350, income tax return must be filed and taxes due. Not withstanding the Kiddie Tax rules which apply to much lower investment income.
See General Instructions for Forms W-2 and W-3, Who must file Form W-2.
You withheld any income, social security, or Medicare tax from wages regardless of the amount of wages; or
You paid $600 or more in wages even if you did not withhold any income, social security, or Medicare tax.
Sorry I’m reposting. The other one seems to have missing soem text
Wages = $600 and = $1000.
Wages >= $2,000, a W-2 is required, FICA is required to be withheld and no FUTA payments are required unless wages in any quarter >= $1000.
Income >= $6,350, income tax return must be filed and taxes due. Not withstanding the Kiddie Tax rules which apply to much lower investment income.
I’m not sure Gino. It may be that household employees get a pass on that rule based on the information I’m reading on that IRS link I posted. Maybe ask a CPA. Or just do the W-2 if you’re between $600 and $2000. It’s not that hard to do. Takes me about 2 minutes to do four of them every year.
I didn’t see Spirit Rider post a source. I tend not to believe stuff like that until I read it on the IRS site. But again, it’s not a huge deal to do a W-2. Seriously. Super easy.
I can’t get the post to paste correctly. Here is the link. Thanks! Hope this works.
https://www.bogleheads.org/forum/viewtopic.php?f=1&t=230329&p=3582440#p3582440
Okay, thank you very much for your help.
Awesome post Whitney! Easy to read and i learned something new. Keep up the great work!
Thank you Whitney – to educate us parents of the benefits. Can you also write briefly on Employer’s perspective. As a parent do I have to apply for EIN if I pay my kids < $2000 to do daily chores. I am assuming the kid simply files the 1040X, and parent doesn't have to create W-2.
If you’re going to employ your kids, yes you need an EIN. The kid may not have to file taxes even though you have to do a W-2 for them. A 1040X is to correct an error on your 1040. You can’t pay your kids to do your household chores. It has to be work for a real business. They can be paid by your neighbors to do their chores though.
At what point can you hire your child as a household employee in your own home and what jobs count as a household employee rather than chores which are a “part of parental training and discipline”? This is in direct contradiction of IRS 926 which says you can employ your spouse or child in such services and that you are not to pay FICA or FUTA when you pay them for rendering those services.
I don’t think you can hire your own child as a household employee to do chores. Give me a break. You really think you could sit across the table from an auditor and argue that’s legit?
At any rate, that doesn’t help you or your child much other than allowing you to contribute to a Roth IRA. What you want is for the child to work for your BUSINESS. That gives you a business deduction. So you don’t pay income or payroll taxes on it, the child doesn’t pay payroll or income taxes on it, and it can go into the Roth IRA never to be taxed again.
So have them work for your business or have them work for the neighbors as a household employee. But I wouldn’t try to justify hiring them as your own household employee.
Hi,
Thanks for a great article Whitney. I have 2 questions.
1. First one is about my daughter who is a bit older (16). She is computer savvy and designed a website for my (sole proprietor) business in 2017 for which I paid her $550 (comparable to market rate). I am wondering – does this qualify her work as a household employee ? She worked at home but the nature of the job is not babysitting or “house-care related”. Would appreciate any pointers.
2. Did Whitney receive a W-2 from WCI ? If not, could she still report the income as earned income? I ask because tax software packages seem to guide filers to report earned income via W-2 though I understand that a W-2 should not be needed if there was no withholding (for children under 21 employed by parents as per Publication 926.
Why would you want her to be a household employee? Just issue her a W-2 and get your deduction.
Yes for 2016. Not for 2017. She worked for a different business in 2017 that contracts with WCI. I don’t recall seeing anything that says I don’t have to issue W-2s, but I guess it’s possible.
Thanks much for your response.
>>Why would you want her to be a household employee? Just issue her a W-2 and get your deduction.
I guess the concern in my mind was that issuing a W-2 to my daughter would require diligence on my part to report her wages via Form 941 in the quarter that she worked. But it’s not a big deal..
Ahhh….
I think I’ve screwed something else up! Looks like I probably ought to be doing 941s even though I’m not withholding anything for those kids. The W-2s/W-3s aren’t enough apparently. Interestingly, the IRS hasn’t said anything about them….
You (and I) might be eligible to do Form 944 instead, which is once a year.
Everything is complicated with the IRS. Apparently we have to be notified by IRA to be eligible to file Form 944 (instead of Form 941).
[From the instructions for Form 944 at https://www.irs.gov/pub/irs-pdf/i944.pdf ]
“Who can’t file Form 944?
The following employers can’t file Form 944.
– Employers who aren’t notified. If the IRS doesn’t
notify you to file Form 944, don’t file Form 944. If you
would like to file Form 944 instead of Forms 941, 941-SS,
or 941-PR, see the TIP under Who Must File Form 944,
earlier.
– Household employers. If you employ only household
employees, don’t file Form 944. For more information, see
Pub. 926 and Schedule H (Form 1040), or Pub. 179 and
Schedule H-PR.
– Agricultural employers. If you employ only
agricultural employees, don’t file Form 944. For more
information..”
( need to be notified by IRS, not IRA!)
BTW, the TIP they are referring to repeats the same need (“.. if the IRS has notified you to file Form 944..”).
You can request the IRS that you qualify and would like to file From 944 instead of 941:
“Requesting to file Form 944 instead of Forms 941. If you’re required to file Forms 941 but believe your employment taxes for calendar year 2020 will be $1,000 or less, you may request to file Form 944 instead of Forms 941 by calling the IRS at 800-829-4933 between January 1, 2020, and April 1, 2020, or sending a written request postmarked between January 1, 2020, and March 16, 2020. After you contact the IRS, the IRS will send you a written notice that your filing requirement has been changed to Form 944. You must receive written notice from the IRS to file Form 944 instead of Forms 941 before you may file this form. If you don’t receive this notice, you must file Forms 941 for calendar year 2020.”
Ref: https://www.irs.gov/pub/irs-pdf/i941.pdf (Page 4)
Hope this helps!
PFB
Fabulous post, Whitney! Congratulations on the tax refund, your writing skills and above all, your clarity of knowledge. This was already a few years back- by now, I bet you’re on to bigger and better things. Keep shining!