Does My Child Care Provider Have to Pay Taxes?

Payments for child care are part of the U.S. tax system, creating responsibilities for both the provider and the parent. For the provider, these payments are taxable income that must be reported to the Internal Revenue Service (IRS). This obligation applies whether they operate a formal business or offer services more informally.

For the parent, these payments can lead to tax benefits, but accessing them requires specific information from the provider. The working relationship between the parent and provider dictates how taxes are handled. This relationship must be correctly identified to ensure compliance with federal tax law.

The Provider’s General Tax Responsibility

Any individual who receives money for providing child care services is earning income that is subject to taxation. The IRS considers all payments reportable income, regardless of the payment method. This applies to everyone from operators of licensed daycare centers to individuals who babysit for friends and family with the intention of making a profit.

This income is subject to two main types of federal tax. The first is standard income tax, based on the provider’s total annual income and filing status. The second is self-employment tax, which is a combination of Social Security and Medicare taxes, analogous to the FICA taxes an employer would withhold from an employee’s paycheck.

The self-employment tax rate is 15.3%, which is 12.4% for Social Security on earnings up to an annual limit and 2.9% for Medicare with no earnings limit. A provider must pay self-employment tax if their net earnings from care are $400 or more in a year. This tax is calculated on Schedule SE, Self-Employment Tax, and filed with the provider’s Form 1040. Because these taxes are not automatically withheld, providers are expected to make estimated tax payments throughout the year to cover their liability.

Classifying the Provider’s Employment Status

A key part of managing child care taxes is correctly classifying the provider’s relationship with the parent as either an independent contractor or a household employee. This classification is determined by the working arrangement and dictates who is responsible for paying employment taxes. The IRS provides detailed guidance in Publication 926, Household Employer’s Tax Guide, to help make this determination.

The primary factor in this classification is control, which the IRS assesses in three categories. Behavioral control looks at who has the right to direct and control how the work is done. If a parent dictates the child’s daily schedule, sets specific rules for activities, and provides detailed instructions that the provider must follow, it suggests an employer-employee relationship.

Financial control considers who directs the business aspects of the job. An independent contractor, such as a daycare center, sets their own rates and has a significant investment in their own facilities. Conversely, a nanny paid an hourly wage by a family who uses the family’s home and supplies is more likely a household employee. The relationship between the parties is the third consideration, looking at how the worker and parent perceive their interaction and if benefits like paid time off are provided.

If the provider is a household employee and receives cash wages of $2,800 or more in 2025, the parent is the employer and is responsible for withholding and paying Social Security and Medicare taxes. The parent must also pay their 7.65% share of these taxes. If total cash wages to all household employees exceed $1,000 in any calendar quarter, the parent must also pay Federal Unemployment Tax (FUTA). Misclassifying a household employee as an independent contractor is considered tax evasion.

Information Parents Need for Tax Purposes

To claim the Child and Dependent Care Credit, parents must gather specific information from their provider. The parent needs the provider’s full name, address, and Taxpayer Identification Number (TIN). For an individual provider, the TIN is their Social Security Number (SSN); for a business, it is an Employer Identification Number (EIN).

This information is reported on IRS Form 2441, Child and Dependent Care Expenses, which is filed with the parent’s tax return. The form requires the parent to list each provider’s name, address, TIN, and the total amount paid to them. Without this complete information, the IRS may disallow the credit. Parents can request this information from their provider using Form W-10, Dependent Care Provider’s Identification and Certification.

If a provider refuses to supply their TIN, the parent is not automatically barred from claiming the credit but must demonstrate “due diligence” in trying to obtain it. The parent should complete Form 2441 with all available information, such as the provider’s name and address. In the space for the missing TIN, they should write “See Attached Statement.”

The parent must then attach a statement to their tax return that explains the steps taken to request the information and the provider’s refusal to supply it. Keeping records of these requests, such as copies of emails or a certified mail receipt for Form W-10, provides evidence of due diligence. The IRS will then pursue the matter with the provider while allowing the parent to claim the credit.