Can a Family Member Get Paid for Childcare: Taxes, Credits, and Filings

Yes, a family member can get paid for childcare, and it’s a common setup. Once the payments are regular, though, the IRS generally treats your relative as a household employee, which brings payroll taxes, year-end forms, and a few filing deadlines into the picture. The upside is real: close relatives like a parent are exempt from most of those payroll taxes, and what you pay can still qualify for the Child and Dependent Care Tax Credit or run through a Dependent Care FSA worth up to $7,500 in pre-tax dollars.

Is Your Relative an Employee or an Independent Contractor

The classification decides which taxes apply, so start here. The IRS test is about control: if you direct not just what work is done but how it’s done, the caregiver is your employee.¹ A grandmother who comes to your house on a set schedule, follows your rules about meals and naps, and uses your supplies is an employee. A relative who runs a licensed daycare at their own facility with other children looks more like an independent contractor.

Most family arrangements land on the employee side. Calling an employee a contractor to skip the paperwork can leave you liable for back taxes, the employee’s unpaid share of Social Security and Medicare, and penalties.²

Which Relatives Are Exempt From Payroll Taxes

This is the piece that makes grandparent care so attractive. You do not owe Social Security, Medicare, or federal unemployment tax on wages paid to your spouse, your child under 21, or your parent.³

The parent exemption has one catch that surprises people. If you are divorced, widowed, or living with a spouse who is physically or mentally unable to care for your child, and the child is under 18, wages paid to your parent for that care are subject to Social Security and Medicare after all.³ The rationale is that the grandparent is filling a role that would otherwise require outside paid care.

Payroll Taxes When the Exemption Doesn’t Apply

If your caregiver is a sibling, an adult child, an aunt, an uncle, a cousin, or a parent who falls into the exception above, ordinary household employer rules apply.

Once you pay $3,000 or more in cash wages during 2026, Social Security and Medicare taxes are due on those wages. The combined rate is 15.3%: 7.65% is your share, 7.65% is the employee’s. You can withhold the employee’s share from their pay or choose to cover it yourself.³

Federal Unemployment Tax works separately. If your total household wages hit $1,000 or more in any calendar quarter, FUTA applies to the first $7,000 of each employee’s wages. The headline rate is 6.0%, but paying your state unemployment fund on time earns a credit of up to 5.4%, cutting the effective rate to 0.6%.⁴

Federal income tax withholding from a household employee is optional. If your relative wants it withheld, they give you a Form W-4.¹

Getting a Tax Break for What You Paid

The Child and Dependent Care Tax Credit

Under 26 U.S.C. §21, working parents can claim a credit for a percentage of what they pay for childcare, including payments to a qualifying family member. The maximum expenses that count are $3,000 for one child under 13 and $6,000 for two or more. The percentage runs from 50% at the lowest incomes down to 20% for higher earners, so the credit itself ranges from $600 up to $3,000.⁵

Both parents (or the single parent in a one-parent household) must have earned income, and the care must let you work or look for work. Paying a relative to babysit while you’re on vacation doesn’t qualify.

Dependent Care FSA

If your employer offers one, a Dependent Care FSA lets you set aside pre-tax dollars to pay a family caregiver. For 2026 the annual household limit is $7,500 ($3,750 if married filing separately), up from the old $5,000 cap for tax years beginning after December 31, 2025.⁶

Money you run through an FSA reduces, dollar for dollar, the expenses you can put toward the credit.⁷ Exclude $5,000 through the FSA with two qualifying children and your remaining credit-eligible expenses drop from $6,000 to $1,000. For most higher-bracket families the FSA wins, but run both numbers.

Relatives Who Cannot Be Paid With Credit-Eligible Money

The credit does not cover amounts paid to someone you or your spouse claims as a dependent, or to your own child under 19 at the end of the tax year.⁵ A sibling who is 19 or older and not your dependent is fine. So are grandparents, aunts, uncles, and adult cousins, as long as you don’t claim them.

Paperwork Before the First Paycheck

Form I-9 to verify identity and work eligibility. Keep it on file for three years from the hire date or one year after employment ends, whichever is later.⁸
An Employer Identification Number, applied for on Form SS-4. This nine-digit number identifies your household on every tax filing.⁹
Form W-4 if the caregiver wants federal income tax withheld.
A short written agreement covering hourly rate, pay frequency, schedule, responsibilities, time off, and notice for termination. Both sides keep a signed copy.

The agreement doesn’t need to be long, but it should be specific. Spell out whether you’ll reimburse mileage, provide meals, or pay for holidays. That heads off arguments later.

Year-End Filings

Report household employment taxes on Schedule H attached to your personal Form 1040. Schedule H totals up Social Security, Medicare, FUTA, and any federal income tax you withheld. For 2026 wages the deadline is April 15, 2027, and any extension on your 1040 extends Schedule H with it.³

You must give the caregiver a completed W-2 by January 31 of the following year.¹⁰ Keep all employment tax records for at least four years: pay stubs, the written agreement, W-4, W-2 copies, and Schedule H worksheets.¹¹

How the Caregiver Reports the Income

Whatever you pay is income to your relative, and they report it on their own return. For a household employee, the W-2 you provide shows the wages and any taxes withheld, and they file from that.¹²

When the Government Pays the Relative Instead

Lower-income families may qualify to have a state agency pay a relative for childcare through the Child Care and Development Fund, the main federal program funding childcare subsidies. CCDF recognizes relatives as legitimate providers, and once a family qualifies, the state can pay the caregiver directly.¹³

Relative providers typically register with the state’s lead childcare agency and pass a background check. Most states require basic health and safety training on safe sleep, recognizing abuse, emergency preparedness, and first aid, often completed within 90 days of starting. Subsidy amounts vary by the child’s age and local market rates, and each state sets its own income thresholds.

Don’t Overlook Insurance

Standard homeowners policies often exclude regular household employees, even a relative. Occasional help might be covered; a family member on a set weekly schedule usually isn’t, absent a specific endorsement or a separate workers’ compensation policy.

Workers’ compensation rules for household employees vary widely by state. Some require coverage once a domestic worker hits 40 hours a week; others require it regardless of hours. Call your state and your insurance carrier before an injury forces the question. The premium is modest next to the exposure.

1
Internal Revenue Service. Topic No. 756, Employment Taxes for Household Employees
2
Internal Revenue Service. Worker Classification 101: Employee or Independent Contractor
3
Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
4
Internal Revenue Service. Topic No. 759, Form 940 – Employers Annual Federal Unemployment (FUTA) Tax Return
5
Office of the Law Revision Counsel. 26 USC 21 – Expenses for Household and Dependent Care Services Necessary for Gainful Employment
6
Office of the Law Revision Counsel. 26 USC 129 – Dependent Care Assistance Programs
7
Internal Revenue Service. Publication 503 – Child and Dependent Care Expenses
8
U.S. Citizenship and Immigration Services. 10.0 Retaining Form I-9
9
Internal Revenue Service. About Form SS-4, Application for Employer Identification Number (EIN)
10
Social Security Administration. Deadline Dates to File W-2s
11
Internal Revenue Service. Employment Tax Recordkeeping
12
Internal Revenue Service. Family Caregivers and Self-Employment Tax
13
Administration for Children & Families. FY 2025-2027 State/Territory CCDF Plans