I would appreciate any help. I am hiring an individual to pick up my kids after school and care for them a couple of hours each day until I get home. I've read Pub 926 and determined her to be a household employee. The wages, however, will not reach $1800 for 2012 nor will they reach $1000 in any calendar quarter. Because of the low wage totals, I know I do not need to pay any taxes, nor do I need to file Schedule H with my personal returns. My question is, what do I give her to document the payment so I can claim the child care tax credit for the wages? I am not paying her under the table; rather I am following the letter of the tax law and I am not required to withhold taxes, pay payroll taxes, or file Schedule H. Do I give her a w-2 simply showing the 2012 wage and no deductions? 1099? HELP!! Thanks again.

“The wages, however, will not reach $1800 for 2012 nor will they reach $1000 in any calendar quarter. Because of the low wage totals, I know I do not need to pay any taxes, nor do I need to file Schedule H with my personal returns. “----->Correct. Your Form 1040 must have Sch H attached ONLY if the nanny was paid more than $1,800 for the year, more than $1,000 in any one quarter of the year or if you withheld federal income tax.You do not even need to pay FUTA tax to the IRS either as the wage doesn’t reach $1000 in any calendar quarter. In general, the IRS requires payroll tax filings by a domestic employer (household employer) who pays a household employee (older than 18) more than $1,800 for cash wages in a calendar year 2012. So, you do not need to withhold federal income tax,FICA taxes/FUTA tax, from your household employee's wages. But if your employee asks you to withhold it, you can. It is up to you.
“My question is, what do I give her to document the payment so I can claim the child care tax credit for the wages? I am not paying her under the table; rather I am following the letter of the tax law and I am not required to withhold taxes, pay payroll taxes, or file Schedule H.”---->You can pay her by check in lieu of a W2. If you pay her in cash, give her a receipt for the payment and keep a copy of the receipt for yourself. The dollar amount is really all she needs for her return. This is not your case, however, if you take your children to the nanny's home for care, the nanny is not your household employee. She'll probably be considered an independent contractor. You'll pay her a gross wage, and she will be on the hook for all the taxes. But you'll still have to prepare Form 1099-MISC to document her income. Since you hire a nanny to provide child care services so that you can work, you may be eligible for the Child and Dependent Care tax credit. To qualify, the children must be under the age of 13 as the services were partly for the care of the children. You need to use IRS Form 2441 to calculate the credit. The credit is a percentage of the nanny's salary expense, to a maximum expense of $3,000 per child and a maximum of two children. Your income determines the percentage.
“ Do I give her a w-2 simply showing the 2012 wage and no deductions? 1099?”---->No W2 UNLESS you withhold taxes form her paychecks; IF the nanny is an independent contractor(as long as household service is her principal occupation), then you need to give her a 1099MISC so she needs to file Sch C/Sch SE for her own self employment tax to the IRS. The IRS almost always defines nannies as household employees because the work is done in the parents' home, and the parents control what is done and how it is done and provide the tools and equipment. (Controlling how your nanny cares for your children is kind of the point of having a nanny, versus taking your children to daycare.) So hiring a nanny means you have become household employer and she is your employee. HOWEVER, some say “in the eyes of the state and the IRS, a person working as a nanny is considered to be self-employed.” You are not required to withhold fed/state income taxes unless your employee asks you to and you agree. If you do not withhold income taxes, your employee must pay these taxes. If your employee pays these taxes herself, she may need to make quarterly estimated tax payments if she receives a 1099MISC. Since the taxes are not withheld from each pay period, the employee has to pay them at the end of the tax year. Money earned as a babysitter is considered self-employed income. If she earned more than $400 in the past year, she will have to claim this on her federal income taxes. She, in general, needs to file Sch C/Sch SE for her self employment taxes.

Thank you for your response. That's in line with what I was thinking. So to sum up, if I want to claim the child care tax credit, for which I am fully qualified up to 20% of the expenses, for the salary paid to the after school care provider, I can pay her weekly by check and give her a 1099 at the end of the year. She is then responsible for everything else. Does that sound correct?

“ I can pay her weekly by check and give her a 1099 at the end of the year. She is then responsible for everything else. Does that sound correct?”--->As mentioned previously, UNLESS she is an independent contractor, you do NOT need to give her a 1099MISC;as long as she is an IC, then you need to give her a 1099 and need to submit a copy of 1099 and 1096 to the IRS. However, I guess she is your employee, you may pa her by check and then she reports th e income on her Sch C/SchSE since the amount on line 29/31 on Sch C and line 4 on Sch SE exceeds $400, I guess, she needs to pay her SEC tax to the IRS.

That clears it up for me. Thanks so very much!