The Internal Revenue Service doesn't make a distinction between child care providers and babysitters. If you – or your teenage son or daughter – care for children on a regular basis or even occasionally, the money you earn is income. This typically means filing a tax return and paying taxes on your earnings.
Claiming income has nothing to do with age or whether you're paid for your services in cash. It has everything to do with how much you or your child earn from babysitting. The threshold is $400 in 2012 for self-employment income. If you earn more than that, you must file a return and report it. If you babysit on a regular basis for one employer, and particularly if you do so during set hours and in her home, your employer will most likely issue you a W-2 after the end of the tax year. In this case, the rules are a little different. If you're single, you don't have to file a return unless you earn more than $9,500 as of 2012, $3,700 if you're married and file a separate return, or $19,000 if you're married and filing a joint return – but the $19,000 includes your spouse's income. If your employer withheld any federal taxes, however, you won't get a refund if you're entitled to one unless you file a return.
If you don't work for an employer and if your babysitting earns you $400 or more, you're self-employed. This involves filing Schedule C with your tax return, which might seem like a lot of trouble if your income was only $400 or so. However, it's entirely possible that you could end up erasing your earnings by completing Schedule C. This form reports what you earned, but it also allows you to take deductions from that income for business expenses. For example, if you advertised your services at some point during the year or had business cards printed, these costs are deductible. Likewise, if you purchased toys or games to amuse the children in your care, or if used your home to provide child care, you can take deductions for these things. Depending on your income, the deductions might exceed what you earned, resulting in negative income. You'd still have to file Schedule C, but it would show a business loss.
If your Schedule C shows that you made a profit from babysitting, you're required to pay self-employment tax on this income. If you worked for an employer, your employer would withhold FICA taxes from your paychecks and match those deductions on your behalf. If you're self-employed, you're both employee and employer, so you must pay both portions of the FICA tax yourself. This amounts to 12.4 percent of your profit in Social Security tax and 2.9 percent in Medicare tax in 2012.
Effect of Tax Credits
You might think you're better off foregoing the money you make babysitting. However, there may be a small silver lining if you go through all this trouble to claim what you earn as income. When you claim income and file taxes, you may become eligible for certain refundable tax credits. This means that if your tax liability is zero, and if you're eligible for a $1,000 refundable credit, the IRS will send you a check for $1,000. Otherwise, the credit comes off your tax bill to the IRS. The earned income credit might bring your child a refund if she had to file a return to report babysitting money and her income was negligible, and you may qualify for some education-related refundable credits if you're paying to put your child or another dependent through school.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.