Flexible Spending Accounts - Child and Dependent Care

[justin]

Annual Benefits enrollment time is here again. We're considering contributing $3600 into a Child and Dependent Care FSA to pay my mother in law for child care services for 2007. Two kids, $300/month (the "family" rate). Under the table of course. Therein lies the problem.

The FSA administrator told me that I would have to fill in a form with the child care provider's name and SS number, among other things. Let's assume for the purposes of my question that my MIL doesn't report the $3600 I pay her for child care services. Anyone want to venture a guess as to whether the FSA administrator will provide the IRS with the name and SS number I give them for my MIL along with the dollar amount reported as payments to her?

I could probably help my MIL find $3600 in ordinary and necessary business expenses incurred in the course of providing child care services such that she would have a net income of zero due to providing child care services. Use of a portion of her house exclusively for business purposes, share of utilities, incidental food, toiletry items, diapers (?), other hygiene items, etc. But this is more complication than I want to deal with for the potential tax savings of $1000.

Anyone think the IRS would flag MIL's returns for failure to report the $3600 due to receiving the income data on her from the FSA administrator? Or should I not make contributions to the FSA and continue the current path of under the table payments?

 

[LOL!]

What is wrong with your MIL paying the taxes on her income?

 

[justin]

What is wrong with your MIL paying the taxes on her income?

The point is that expenses would most likely offset any income she received. However the hassle of record keeping and additional tax prep and accounting fees to properly account for and document these expenses would offset any tax benefits received (by me).

Unless you are suggesting that I should issue a 1099-MISC to my independent contractor MIL and report the income to the IRS no matter what. My implicit assumption in my original post was that the informal employment situation would continue to be informal. I mean I'll be paying $300/month for child care for 2 kids which has a market rate of $1500-2000/month.

 

[d]

it's either under the table, or on the table ... trying to have it both ways is ill advised.

 

[LOL!]

I have a side consulting job. There are no extra tax preps fees nor accounting expenses to deal with that, so I am not sure what you are writing about.

I cannot imagine that your MIL would have any significant job-related expenses if she took care of your children in your home. In her home, maybe a little bit more in write-offs, but not really much, so why bother?

BTW, yes, I am suggesting that your MIL pay all the taxes she is legally required to: FICA, medicaid, income, etc. You can just pay her more to cover those as well. She could put the money in an IRA or other self-employed retirement plan if she wanted.

 

[jazz4cash]

Anyone want to venture a guess as to whether the FSA administrator will provide the IRS with the name and SS number I give them for my MIL along with the dollar amount reported as payments to her?
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I But this is more complication than I want to deal with for the potential tax savings of $1000.

Been there, Brother
1. Actually, YOU will report on YOUR return MIL's SSN and amount paid to her for dependent care expenses, so the FSA admin is not involved for that part

2. If ya wanna blow off potential tax savings of $1,000.00, you could just pay MIL an add'l $1000 and it will more than offset her tax liability on the income.

What maybe more practical is to compromise between the tax savings to you and tax liability to her. You could pay family rate for her services and gift a portion of her tax liability if she reports the income.

When I say "been there" its because I had similar arrangement with SIL, EXCEPT she did not give us the "family rate". I was not a happy camper, but she needed the income, so I held my tongue. I did let her know I was required to report the expense and her TIN, so it was up to her to check with a tax advisor.