Pay Grandparents for Childcare and Claim the Tax Credit

You can claim the Child and Dependent Care Credit for paying grandparents for childcare, and the IRS treats a grandparent the same as most other care providers. The credit is worth 20% to 35% of up to $3,000 in care expenses for one child or $6,000 for two or more, provided you aren’t claiming the grandparent as a dependent and the care let you work or look for work.¹

Which Grandparents Qualify as a Paid Caregiver

The tax code excludes a short list of people you can’t pay for care and still claim the credit: the child’s other parent, anyone you or your spouse claims as a dependent, and your own child who was under 19 at the end of the year.² Grandparents aren’t on that list. A grandparent is not your child and almost never the child’s parent, so the only rule that realistically matters is the dependency test.³

That test is where families most often go wrong. If you claim an elderly parent as a dependent on your return because they live with you and have low income, every dollar you paid them for childcare is disqualified from the credit. You cannot do both. The grandparent’s age itself doesn’t matter; the under-19 rule applies only to your own children.

The care also has to be for a qualifying person, which usually means your dependent child who was under 13 when the care was provided. The expense has to be work-related, meaning the care allowed you (and your spouse, if filing jointly) to work or look for work. A non-working spouse still counts if they are a full-time student or unable to care for themselves.¹ And qualifying expenses are capped by the lower earner’s income on a joint return: if one spouse earned $2,500, only $2,500 in care costs can be counted.

One thing to be upfront about with the grandparent: the money you pay is taxable income to them, and they have to report it on their own federal return.

How Much the Credit Is Worth

The percentage you get depends on your adjusted gross income. Taxpayers with AGI of $15,000 or less get the top rate of 35%. The rate drops one point for every additional $2,000 of income and bottoms out at 20% for anyone with AGI over $43,000.⁴ Most working families with grandparent care costs land in the 20% bracket, which translates to a maximum credit of $600 for one child or $1,200 for two or more.

The credit is nonrefundable. It can wipe out tax you owe, but it won’t generate a refund on its own. If other credits have already pushed your liability to zero, this one has nothing left to offset. Also worth knowing: expenses for education above kindergarten, like first-grade tuition, don’t count as qualifying care.

Claiming the Credit on Form 2441

You claim the credit by attaching Form 2441 to your return. Part I asks for the care provider’s name, address, and taxpayer identification number, which for a grandparent is normally their Social Security number.⁵ The total you paid the grandparent during the year goes on the form as well.

Form W-10 (Dependent Care Provider’s Identification and Certification) is a clean way to collect the grandparent’s information. You don’t file it with the IRS; you keep it as proof you asked.⁶

If the grandparent won’t give you their Social Security number, you can’t just leave the field blank. Write “See Attached Statement” in the TIN column and attach a statement with the grandparent’s name, address, and your explanation of why you couldn’t get the number. The IRS may follow up, and without a valid TIN the credit can be denied outright.

Hold on to payment records — bank statements, canceled checks, transfer confirmations — for at least three years after you file. That’s the standard window the IRS has to audit most returns.⁷

When Paying a Grandparent Triggers the Nanny Tax

Here’s the obligation that often takes families by surprise. If the grandparent provides care in your home and you control how the work is done, the IRS considers them your household employee, even though they’re family.⁸ That brings its own tax rules, separate from the credit itself.

For 2026, cash wages of $3,000 or more during the calendar year trigger Social Security and Medicare taxes. The combined FICA rate is 15.3%, split evenly: 7.65% withheld from the grandparent’s wages and 7.65% paid by you as the employer. You can choose to cover the grandparent’s share out of your own pocket, but the full 15.3% still has to reach the IRS. Noncash benefits like meals or lodging don’t count toward the $3,000 threshold.⁹

A separate federal unemployment tax (FUTA) kicks in if you pay $1,000 or more in cash wages to household employees in any calendar quarter of 2025 or 2026. The headline rate is 6.0% on the first $7,000 of wages, but a state unemployment tax credit of up to 5.4% usually brings the effective rate down to 0.6%. FUTA is yours alone to pay; you never withhold it from the grandparent.⁹

You report all of this on Schedule H, attached to your annual return.¹⁰ You’ll need an Employer Identification Number to file it, which you can get at IRS.gov/EIN. You also have to give the grandparent a Form W-2. For 2026 wages, Publication 926 sets the deadline to furnish the W-2 at February 1, 2027.⁹

Ignoring these rules is expensive. The failure-to-file penalty is 5% of the unpaid tax per month, up to 25%, with a minimum of $525 (or 100% of the tax owed, if less) once you’re more than 60 days late.¹¹ State unemployment and disability insurance may apply on top of all of this and vary by state.

One narrow boundary: if the grandparent provides the care in their own home rather than yours, and you aren’t directing the work, the household-employee rules generally don’t come into play the same way, because the IRS test turns on care provided in your home under your direction.⁸

Coordinating With a Dependent Care FSA

If your employer offers a Dependent Care Flexible Spending Account, you can use it to pay a grandparent, subject to the same related-party rules. The maximum you can exclude from income through a DCFSA is $5,000 a year ($2,500 if married filing separately).¹

The two benefits don’t stack cleanly. Every dollar you run through the FSA reduces your qualifying expense limit for the credit by the same amount. Contribute $5,000 to a DCFSA with two qualifying children, and your remaining credit expense limit falls from $6,000 to $1,000. For families in the 20% credit bracket, the FSA usually delivers more savings because contributions avoid both income tax and FICA. Part III of Form 2441 is where you work the coordination out before figuring any remaining credit on Part II.

What the Payment Can Do to the Grandparent’s Benefits

Because wages from you count as taxable earnings for the grandparent, two of their own benefits can shift.

If the grandparent collects Social Security retirement benefits and hasn’t reached full retirement age, their earnings face an annual limit. For 2026 that limit is $24,480, and Social Security withholds $1 of benefits for every $2 earned above it.¹² In the year they reach full retirement age, the limit rises to $65,160 and the withholding ratio becomes $1 for every $3 over, counted only in the months before the birthday. After full retirement age, no limit applies. Withheld benefits aren’t lost forever; Social Security recalculates and raises monthly payments later. But the short-term hit is real.

Childcare income also raises the grandparent’s AGI, which Medicare uses on a two-year lag to decide income-related premium surcharges (IRMAA) on Part B and Part D. For 2026, individual filers with modified AGI above $109,000 pay more, based on their 2024 return.¹³ Most grandparents watching the kids part-time won’t come close, but one with pension income, retirement distributions, and childcare wages combined could cross a threshold.

If the grandparent’s income already sits near either line, run the numbers before settling on a payment amount. A modest check from you could cost them more in reduced benefits or higher premiums than it’s worth.

1
Internal Revenue Service. Publication 503 (2025), Child and Dependent Care Expenses
2
Office of the Law Revision Counsel. 26 U.S. Code 21 – Expenses for Household and Dependent Care Services Necessary for Gainful Employment
3
Internal Revenue Service. Topic No. 602, Child and Dependent Care Credit
4
Internal Revenue Service. Instructions for Form 2441 (2025)
5
Internal Revenue Service. About Form 2441, Child and Dependent Care Expenses
6
Internal Revenue Service. About Form W-10, Dependent Care Provider’s Identification and Certification
7
Internal Revenue Service. How Long Should I Keep Records?
8
Internal Revenue Service. Topic No. 756, Employment Taxes for Household Employees
9
Internal Revenue Service. Publication 926 (2026), Household Employer’s Tax Guide
10
Internal Revenue Service. About Schedule H (Form 1040), Household Employment Taxes
11
Internal Revenue Service. Failure to File Penalty
12
Social Security Administration. Receiving Benefits While Working
13
Medicare.gov. 2026 Medicare Costs