The Tax Implications of Caring for Grandchildren

Caring for your own grandchildren may seem like a simple affair. You get to spend more time with them and you are helping out their parents.

But, you should also understand the tax implications.

Personal or Business?

Whether you are caring for your grandchildren in a personal or business relationship makes all the difference.

In a personal relationship you are caring for the grandchild without thought to making any money. You are caring for the child because she is your family. Even though the grandchild takes up a space in your program that would otherwise fill with a paying client, you don't consider the care you offer as part of your business.

In a personal relationship there is no income to report and no expenses you can deduct when caring for your grandchild. If you buy items for your grandchild that you wouldn't have purchased except for the fact that you are a family child care provider (tickets to a museum), don't count this as a business expense. This is because you are treating this relationship as a personal one.

You cannot count any of the hours you care for your grandchild as part of your Time-Space Percentage calculation.

If you receive Food Program reimbursements for serving your grandchild food, you should report the amount you receive as taxable income on Schedule C, but also report the same amount as a business food expense. This will mean you won't pay any taxes on the reimbursement.

Note: What if the grandchild's parents are paying you money to care for their child, but the amount of money is much less than other parents pay? I would consider this still a personal relationship, because you wouldn't offer this arrangement to other parents. Therefore, don't report this as income and don't count any hours or any expenses.

Business Relationship

You are in a business relationship when caring for your grandchild if you are being paid the same rate as other parents pay you for the care of their child. Even though your grandchild is family, you are providing care for her as part of your business.

In a business relationship you would report all the money you receive from the grandchild's parents as taxable income.

You can deduct the cost of any supplies, toys or other items you buy that are used by the grandchild during your daycare hours. (If your grandchild also uses these items when the other children are not present, you must apply your Time-Space Percentage before deducting them.)

You can count the hours you care for your grandchild as part of your Time-Space Percentage calculation as long as you are being paid during these hours. For example, let's say your regular hours are 7am - 5pm, Monday through Friday. If your grandchild stays until 8pm on Monday, you wouldn't count these three hours unless you are being paid for this care at the same rate as other parents. The same thing would be true if your grandchild came over to your house for four hours on Saturday.

What if you don't offer other parents the opportunity to pick up their child at 8pm or to bring their child over on Saturday? You could still count this time as long as the fee you are charging for this time is reasonable. A reasonable fee would be one that you would charge a parent not related to you for care during this time.

If you received Food Program reimbursements for your grandchild, you would count this as income. You can count deduct the cost of all the meals and snacks your grandchild eats, as long as you are being paid while they are eating.

Note of Caution

If you treat your grandchild as being in a business relationship with you, the IRS is likely to look at this closely in an audit. The IRS will be looking to see if you are following different rules when caring for your grandchild than you follow with the other children in your program. If so, they are likely to argue that you have a personal, not business relationship.If you have a personal relationship: no income, no expenses. If you have a business relationship: report the income and claim the expenses.

None of this is probably as important to you as it is to be able to spend more time with your grandchild. So, enjoy yourself!

Tom Copeland - www.tomcopelangblog.com

Image credit: https://www.publicdomainpictures.net/en/view-image.php?image=189143&picture=grandma-and-great-grandchildren