| “My mother-in-law drives to our house every day to care for my son while my wife and I work. She won't take payment for her service but she agreed to use a credit card that I provided to pay for the gas she used driving back and forth”===>I guess under the tax law, providing the card so that your MIL can pay for the gas she uses driving back and forth is aothet form of compensation for her child care service that she provides you and she needs to report it on her return. UNLESS your MIL is your EE( I mean unless you issue her a W2), she needs to report the total amount of money used to pay for her gas o Sch C and Sch SE as long as the amon ton Sch C line 29 / 31 is $400 or exceeds $400 then she needs to file return and ALSO as long as the amoun ton Sch SE line 2 / 3 is ALSO $400 or exceeds $400 she needs to pay self employment tax to the IRS. I mean there is no difference in providing her the card for gas expenses or paying her regular wage. However, if you issue her W2 then yo need to withhold FICA tax from her paycheck. If she is a contractor(a self employer) then you may/may not issue her a 1099 (then you do not need to withhold FICA tax from her paycheck).In this case you need to submit both a copy of 1099/1096 to the IRS by Feb 28 each year.
“1. Does this qualify as a child care expense?”=====>It depends; The child care expenses must be work-related.As long as the amoun ton Sch C line 29 / 31 is $400 or exceeds $400 , then as said she needs to report it on her return, then yo can deduct it on your return. You should keep records about the child care provider and amounts paid. If you're allowed to deduct $1.2K for child care expenses but your work pays you $1K per year for child care, then you can only take a deduction of $200. You can take a tax deduction on a percentage of your work-related child care expenses. The IRS Table provides the percentage you must apply to your agi in order to figure out your deduction. Therefore, if you're AGI is $50K, you are entitled to a 20% deduction. So, if you paid $1.2K in the year for work-related day care expenses, you may be able to take allowable tax deductions of $240 for child care. Of course, you can't go over $3,000 for one qualifying child (or $6,000 for two or more).
“2. If it does and I claim it, will the IRS hold her liable for taxes on this expense since I'll have to list her name and SSN as the provider?”====>As said above, it is your MIL’s income/sort of compensation, then yes she needs to report it on her return. UNLESS your MIL is a self employer, then she may report it on her 1040 line 21 other income(as long as she receives the compensation only at this time). If she is a self employer then she need to report it on Sch C/SCh SEand yu may/may not issue a 1099; if she is an EE then you need to issue her a W2 and she needs to report the income on 1040 line 7 as her wage.
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