Yes, grandparents can get paid for childcare. Families handle it two ways: a private arrangement where the parents pay directly, or a state-run subsidy that pays the grandparent as an approved relative provider. Both are legal, both create taxable income, and both come with tax rules that are often more favorable than hiring an unrelated nanny. The details below cover what to set up, what to report, and what to watch out for on each side.
Paying a Grandparent Directly
The simplest route is for parents to pay the grandparent out of pocket. No agency, no application. The arrangement can be as flexible as the family wants.
A short written agreement is worth the small effort. It doesn’t need a lawyer. Cover the weekly schedule, the hourly or weekly rate, how meals and transportation are handled, and how either side can change the terms. Writing it down prevents the kind of misunderstandings that strain family relationships, and it creates the paper trail parents need to claim the Child and Dependent Care Credit later.
Whether the grandparent counts as a household employee depends on where the care happens and who sets the rules. The IRS says that if you can control not only what work is done but how it’s done, the worker is your employee, whether the hours are full-time or part-time.1Internal Revenue Service. Hiring Household Employees A grandparent who comes to the parent’s home and follows the parent’s routines is almost certainly a household employee. A grandparent who takes the kids at their own house, uses their own supplies, and runs the day their own way generally is not.
The FICA Exemption for Parents Hiring Their Own Parents
Here is where grandparent childcare gets a tax break that nannies and babysitters don’t. When a parent employs their own parent as a household worker, the wages are generally exempt from Social Security and Medicare taxes, no matter the amount paid.2Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide The 15.3% FICA bill that normally gets split between a household employer and employee simply doesn’t apply in most families.
The exemption drops away only when all of these conditions hit at once:
- The grandparent cares for a child under 18, or a child with a physical or mental condition that requires adult care for at least four continuous weeks in the quarter.
- The parent is divorced and not remarried, is widowed, or is living with a spouse who has a physical or mental condition that prevents them from caring for the child for at least four continuous weeks in the quarter.
In a two-parent household where both parents are able-bodied, that exception almost never applies, and the grandparent’s wages stay exempt from FICA.3Internal Revenue Service. Family Employees The wages are also exempt from federal unemployment tax unless that same narrow exception is met.2Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
If a family does fall into the exception and crosses $3,000 in cash wages for the year, Social Security and Medicare taxes apply to every dollar paid that year.4Social Security Administration. Employment Coverage Thresholds
How the Grandparent Reports the Income
Childcare money is taxable whether it comes from family or from a subsidy program. How a grandparent reports it depends on whether they are actually running a childcare business.
A grandparent who only watches their own grandchildren is not considered to be in the trade or business of providing childcare. That income goes on Schedule 1 (Form 1040), line 8j, as other income, and no self-employment tax is owed.5Internal Revenue Service. Family Caregivers and Self-Employment Tax
A grandparent who also watches other people’s children, or otherwise operates a daycare, is in a trade or business. That income goes on Schedule C, self-employment tax applies to the net profit, and ordinary business expenses (food, supplies, mileage, a portion of home costs) are deductible.5Internal Revenue Service. Family Caregivers and Self-Employment Tax
This split trips up a lot of families. A grandparent who only cares for their own grandkids is sometimes told to file Schedule C, which triggers self-employment tax they don’t actually owe. Getting the right form can save hundreds or thousands of dollars a year.
What Parents Can Claim at Tax Time
Parents who pay a grandparent for childcare may be able to claim the federal Child and Dependent Care Tax Credit. Starting in 2026, eligible families can claim up to 50% of qualifying expenses at the lower-income end, or 35% at moderate incomes. The expense cap is $3,000 for one child and $6,000 for two or more.
To claim the credit, parents need the grandparent’s name, address, and Social Security number or taxpayer identification number on the return. A cash-only, no-paperwork arrangement makes the credit impossible to claim. A written agreement and consistent payment records fix that.
A dependent care flexible spending account through an employer is another option, with pre-tax contributions of up to $7,500 in 2026. FSA dollars reduce the expenses that qualify for the credit on a dollar-for-dollar basis, so compare the two before choosing.
Getting Paid Through a State Childcare Subsidy
Grandparents can also be paid as approved providers under the federal Child Care and Development Fund, the block-grant program that states use to subsidize childcare for low- and moderate-income working families. Federal rules specifically include a caregiver who is at least 18 and provides care only to related children, including grandchildren and great-grandchildren, as an eligible provider.6eCFR. 45 CFR Part 98 – Child Care and Development Fund
The parent, not the grandparent, applies. The state then pays the grandparent-provider directly or reimburses the family. The parent generally has to be working, in school, or in a job training program, and the child typically must be under 13 (with exceptions for children with disabilities). States set their own income cutoff, which cannot exceed 85% of the state median income for a family of that size.6eCFR. 45 CFR Part 98 – Child Care and Development Fund Rates paid to relative providers are often lower than rates paid to licensed centers, though some states pay the same rate regardless.
Federal CCDF rules require providers to meet health and safety standards covering first aid, CPR, safe sleep, and recognizing child abuse, but states have the option to exempt relative providers from some or all of those requirements. Many do, especially for grandparents caring for their own grandchildren. Whether your state wants a background check, training, or a home inspection depends entirely on where you live, so call your state’s childcare assistance office before you assume anything.
Two other federal programs are sometimes confused with paid childcare but answer a different question. Temporary Assistance for Needy Families offers child-only grants when a grandparent is raising a grandchild without the parents in the picture.7U.S. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation (ASPE). Children in Temporary Assistance for Needy Families (TANF) Child-Only Cases with Relative Caregivers The Title IV-E Guardianship Assistance Program helps states make ongoing payments to grandparents who were foster parents first and then took legal guardianship.8The Administration for Children and Families. Kinship Care Neither one is a payment for babysitting; both assume the grandparent has taken on primary care of the child.
How Childcare Pay Can Affect a Grandparent’s Benefits
This is the piece grandparents often miss until the first reduced check arrives. Earning childcare income can shrink or complicate benefits already coming in.
Social Security Retirement
If you collect Social Security before full retirement age and earn more than $24,480 in 2026, Social Security withholds $1 in benefits for every $2 you earn above that limit. In the year you reach full retirement age, the limit jumps to $65,160 and the reduction drops to $1 for every $3 over.9Social Security Administration. Exempt Amounts Under the Earnings Test Once you hit full retirement age, the earnings test ends. Withheld benefits aren’t permanently gone; Social Security recalculates your monthly amount at full retirement age to credit the months that were reduced.10Social Security Administration. Program Explainer: Retirement Earnings Test
Supplemental Security Income
SSI is less forgiving. The 2026 federal benefit rate is $994 per month for an individual, and earned income above a small exclusion reduces your benefit dollar for dollar after the applicable disregards.11Social Security Administration. What’s New in 2026 Enough childcare income could cut or wipe out the SSI check and, in states that tie Medicaid to SSI, affect health coverage too.
Medicaid
Medicaid income limits vary by state, but many states cap adult eligibility at 138% of the federal poverty level, which works out to roughly $22,000 for an individual in 2026. Childcare pay counts. Before agreeing to a regular paid arrangement, check with your state Medicaid office so you know exactly where your household’s line sits.