Q: I live with my mother, and she babysits and home-schools my child. I am divorced and live with her and my child. She directs the home-schooling herself and provides her own supplies. Is she considered my employee, is she self-employed, or neither?
Al, New Bedford MA
A: The answer is "no" and "self-employed." Your mother could be what would be termed a "household employee" when she babysits (but an exception applies), and a self-employed teacher when she teaches. The former is probably not taxable income, but the latter is...
There are actually two situations here:
Babysitter. This comes under the "household employee" rules. In general, anyone who performs babysitting (or other domestic) duties is considered your employee. There is a special exception for parents who would otherwise be a household employee, but the child is under age 18 (or special-needs of any age), and the parent of the child is divorced, widowed, or married to a special-needs spouse. In this case, your parent is not your employee. Based on your question, it would seem that the babysitting aspects of care would not be taxable provided your child is a minor or special-needs.
For more information on household employees and the parent exception, see IRS Publication 15, "Employer's Tax Guide."
Home-schooling. This is a horse of a different color. Your mother would probably be considered a self-employed teacher if you don't have control over how she conducts the teaching. Very briefly, this includes "behavioral control" (instructions or training you give to her), "financial control" (unreimbursed expenses, the extent of the worker's investment, if the worker is paid on a fee basis, and the ability of the worker to realize a profit or loss), and the "relationship of the parties" (written contracts, fringe benefits, permanency of the relationship, and the centrality of the actions performed).
It's important to note that simply avoiding paying your Mom in cash isn't enough. Any value you provide to her (cash, paying her bills, providing free rent, etc.) is considered taxable income to her.
For more information on these tests, see IRS Publication 15A, "Employer's Supplemental Tax Guide," and this helpful posting of the so-called "20 Points" test that draws out the three tests.
How to Handle All This
First, I would separate the baby-sitting and the home-schooling activity. This is best done by drawing up a contract that clearly states that she is only being compensated for home-schooling, and that any baby-sitting activities she performs are treated under the exception to the household employee rules.
Second, I would try to satisfy as many of the "20 Points" as you can in the contract. If your goal is for her to be your employee (with the concomitant quarterly payroll tax filings and annual W-2 issuance which probably involve hiring a payroll company), structure the contract that way. If your goal is to have her be an independent contractor, have the contract spell out the relationship in that manner. For instance, you might say something like, "Mom acknowledges that she is responsible for furnishing all teaching supplies without reimbursement from Me" (insert names, obviously). This doesn't have to be super-formal, but you may want to go that direction if you are nervous.
Finally, follow all legal forms to make sure the IRS doesn't reconstitute this as an employer-employee relationship. If you manage to meet 15 of the 20 points, be sure to follow through on that. Secondly, you will need to issue your mother a 1099-MISC by January 31st of the subsequent year if you pay her $600 or more. She will then, in turn, have to account for expenses and pay taxes on any profit.
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